I moved 20% to treasuries a while ago betting on a pullback. Some data came in this week that wasn’t in my thesis.

Posted about this before. Moved 15% of my equity allocation into short duration treasuries on the breadth divergence. Added another 5% after PPI came in at 6%. The thesis was simple, CPI at 3.8%, breadth at 53%, rate hike odds at 39%, pullback to the 20 day around 700-710.

SPY is at 744. Still holding the treasuries at 4.3%. But some data came across this week that wasn't part of my original analysis and it changes the setup enough that I want to lay it out.

M2 money supply hit a new all time high of $22.6 trillion in February. Growing 4.8% year over year after contracting in 2022-2023 for the first time since the 1930s. That contraction coincided with the bear market. The re-expansion is running right alongside this rally. The Fed is also running $40 billion a month in Treasury purchases they're calling "Reserve Management Purchases." That's QE with a different press release. Bank deposits up $611 billion since December per Fed data. That's a wall of new liquidity entering the system in 5 months and it goes a long way toward explaining why SPY keeps grinding higher on days when the macro says it shouldn't.

The breadth story is also more nuanced than I was treating it. StockCharts published a piece this week showing the Value Line Arithmetic Index, which tracks the average stock equally weighted, is actually beating SPY year to date. The "two thirds of stocks closed red" stat I cited was one PPI reaction session. Over the quarter the picture looks different.

Tudor Jones compared this to 1999 and I cited that as bearish last week. Didn't include the part where he said the rally could run another one to two years before anything breaks. That context matters.

Not unwinding the treasuries yet. CPI and PPI are real numbers and NVDA earnings May 20 could go either way. But I'm not adding to the defensive position either. If NVDA delivers and the liquidity data keeps trending this way, I'll probably start rotating half back into equities by month end. The original thesis was built on breadth and inflation. The liquidity side of the equation is pushing in the other direction harder than I accounted for.