[TTI] Fed Net Liquidity Indicator

28 May 2023

📜 ––––HISTORY & CREDITS
The Fed Net Liquidity Indicator is a tool developed after reading Max Anderson's twitter thread. This indicator is based on the calculation of the Fed's balance sheet, the Treasury General checking account, and what banks are parking at the overnight repo window at the Fed. The net of these three components gives us the net liquidity available to the markets, which is considered the fuel behind market moves.

🎯 ––––WHAT IT DOES
The Fed Net Liquidity Indicator provides a visual representation of the net liquidity levels in the market. It plots the SPX along with blue shading that represents the net liquidity levels. It also includes risk on/risk off signals and a fair value line that measures whether the market is overbought or oversold compared to the net liquidity readings.

The indicator also includes two levels for overbought and oversold conditions. The "short/hedge" level indicates that the market is becoming overbought and it's time to reduce risk-on positions. The "euphoric" level indicates extreme overbought conditions and it's time to actively short the market or exit. On the other side, the "bounce" line indicates oversold conditions and a potential short-term pop, while the "capitulation" level indicates extreme oversold conditions and a potential for a significant bounce.

🛠️ ––––HOW TO USE IT
To use the Fed Net Liquidity Indicator, you first need to set it up on your chart. Once set up, you can use it to guide your trading decisions based on the net liquidity levels, risk on/risk off signals, and the fair value line.

👉Follow the net liquidity levels: The market generally follows the net liquidity. If the liquidity is increasing, the market tends to go up, and if the liquidity is decreasing, the market tends to go down.
👉Pay attention to risk on/risk off signals: These signals can help you understand the market environment and adjust your positions accordingly. A risk-on signal indicates a good time to expose yourself to the market and go long on risk assets like stocks and crypto. A risk-off signal indicates that it's time to exit the market, hedge your positions, or go short.
👉Use the fair value line: This line can help you determine whether the market is overbought or oversold compared to the net liquidity readings. If the market is rising steeply but the liquidity is not confirming that, it could indicate overbought conditions. Conversely, if the market is falling but the liquidity is not confirming that, it could indicate oversold conditions.
👉Consider the overbought and oversold levels: These levels can help you identify potential tops and bottoms in the market. If the market reaches the short/hedge level, it's time to reduce risk-on positions. If it reaches the euphoric level, it's time to actively short the market or exit. On the other side, if the market reaches the bounce line, it could indicate a potential short-term pop. If it reaches the capitulation level, it could indicate a potential for a significant bounce.