#70 S2N: Money Supply Growing Again

Author

micksonmatch
May 29, 2024

S2N Spotlight

Not since the end of 2022 has M2 Money Supply been positive.

You may recall a few weeks ago I shared a strategy using M2 Money Supply growth that was above or below its 200 day moving average as a signal to enter or exit the broad equity markets. Based on some feedback from a reader I made this chart of the SP500 log scaled, this is technical and I won’t go into too many details here but when looking at longer term charts working with log scale is much more accurate at presenting a clearer picture than a linear scale. I promise to do a long form blog post on this as it is important and not well understood. I haven’t been showing charts in this scale as much as I should have in the past, my main reason was because I could transform the index easily with Python code, but the labels of the axis was being shown in powers of 10 which is not very user friendly. It was silly of me as investing a little bit of time to figure it out would have been an easy enough time investment to help improve the quality of my work. I share the few lines of code that made all the difference but being such a crappy programmer it took me longer than it should have. I do want to add one of the huge benefits of these daily letters is how much my coding skills have improved. I could take a much easier approach using the charts that others produce or just use 3rd party software to create the charts. I have opted to build everything myself in Python to give me maximum control over the data, the fact that it is free is another cool bonus. It really is liberating using a powerful coding language like Python to present something that is not always possible with the limitations that come from purchased software. I have digressed. 

# Set the y-axis to logarithmic scale, This was the easy part.
ax1.set_yscale('log')

# Use LogLocator to set the number of ticks
ax1.yaxis.set_major_locator(LogLocator(base=100.0))

# This was the hard part to customize the minor ticks seems so simple now
ax1.yaxis.set_minor_formatter(ScalarFormatter())

Let us get back to what this strategy is saying. Well you can see there was a buy signal generated in November 2023. On a comparative risk adjusted basis this strategy’s Sharpe Ratio outperforms buy and hold. It is not often that you come across a strategy that is so robust over so many years. Definitely one I plan to keep exploring further.

Just so you can look at a comparison of this chart with linear scaling here goes. I am hoping you can see the difference.

S2N Observations

I know this letter is feeling a little technical. You know how the saying goes, “when you are a hammer everything looks like a nail. ” I was scrolling through some data and I thought I would highlight another common misunderstood difference in approach.

I have chosen to use US Corporate Profits before tax as it provides a nice segue into my next observation, but there are a couple of interesting observations first.

I like to work with year-on-year % returns to other variations. I am not going to say either is right or wrong I simply want to bring the differences to your attention. The data is monthly data. When it is year-on-year it means that as per the above chart the % return is December 2023 over December 2022.

In the chart above it is the same data however the change of December 2023 from November 2023 is annualized. That means you first calculate a monthly amount and then effectively multiply by 12. This method will naturally reward and penalize a month more than the YOY method. Importantly the average of both are essentially the same. I guess it depends how you like to eat your hotdogs. Do you like plain mustard or hot?

Assuming you are not visually impaired you will probably have noticed that corporate profits for nearly 100 years have been mean reverting. It doesn’t matter how hot the latest bull or bear market is, one thing that is clear, is the self correcting nature of corporate profits around a mean of 7%. With that setup lets tackle the latest hottest most hyped stock in the world. Mom I know you are reading can you guess?

I have a super smart subscriber base so I am pretty sure you all guessed it, Nvidia.

h/t to Adam Khoo.

Typically the higher a stock goes the more expensive it becomes. At least that is what usually happens.

A year ago, when NVDA was selling at $277, its earnings per share was $0.82 and its P/E ratio was 147xToday, NVDA’s share price is up +284% to $1,064…. BUT… Its earnings per share are up +629% to $5.98. Its P/E has fallen to 62x… forward P/E is now at 30x. So, NVDA is CHEAPER today than it was a year ago.

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