Friday, October 17, 2014

Stock market is all fixed. Return to your regularly scheduled Dancing with the Stars episode

The market has exploded higher today on hints, rumors and innuendo that the world's central banks were just kidding about that whole "ending QE" thing.

This is the quandary that the central banks have created.  Every time there is a hint of ending their low cost borrowing programs (QE) the markets throw a mini-temper tantrum until the Fed relents.  This time all it took was 2 weeks to get the Fed to calm everyone with rumors of QE4.

As a point of reference consider this chart from Goldman & The Federal Reserve.


5 yr chart of the S&P 500



The stock market has gone so long in this artificially supported mode that all of the "corrections" of the past 5 years barely even register.

However, look at these 2 charts - see that little dip in stocks (the blue line) in mid-2010?  That is when QE was supposed to end.  However, stocks dipped 10% and the Fed came to the rescue with QE2 at the end of 2011 (note stocks not only recovered from the dip but added another 15%).

Then in the end of 2011 stocks started to dive again - so Operation Twist was launched and stocks recovered in early 2012.  In late 2012, stocks just flat-lined and that was enough to garner QE3 which led to the 30% explosion in stocks over the past 18 months.

This brings us to the present day - the blue line shows the 5-8% decline we've seen in stocks this month.  The top chart shows what the Fed is supposed to do with QE.  However, now that is clear that the Fed really intends to take away the markets meth this month, the stock market freaked out again and that has caused many to say that QE4 is on the table.  We all joked about QE2, 3, 4.... when the original QE program was launched, but here we are.  Stocks have become fully dependent on central bank support.  Without this support I suspect stocks would be 30% lower than they are today however, there is no one willing to force them to pull the plug and thus it's rally on for today.

Buy the dips and sell the rips.......

Cheers!

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