QE2 DID IT WORK?
The most widely anticipated event in the financial world in quite some time is upon us, the end of QE2. Of course the magic question is did it work? I would argue that it did, but not for the reasons that are politically expedient. It is my belief and I have stated it all along in here, that the main purpose of this was to create a stock market rally. Although on the surface it certainly appears that Barry and Co are the biggest crew of numbskull's in history, there has to at least be a few among them that realize that what they wanted to embark on was not going to help the unemployment situation or the economy in this country. As a result, they needed to create some type of smokescreen that gets people somewhat distracted from the truth of what is really going on. How could they sell a recovery story without at least one thing recovering? Viola, a huge Stock market rally. In the Feds defense, they did state openly they intended to raise asset prices by doing this, and they certainly have done that without question. As to the merits of whether it is wise to have done that, most of us do not think so.
However, with their goal having been to raise prices, they have accomplished that. The next chart shows what has happened to Bond prices, and overall they have stayed about the same, having dropped a small amount just recently to take us just under where they were in September of last year when this was announced.
In summary, we cannot argue that they did not accomplish what they were trying to do, raise prices. What we certainly can argue about is whether they created a much more slippery slope by doing this going forward, than what have otherwise happened on it's own. Where we find ourselves now is in a position where the powers that be have determined that nothing good can happen on it's own without them artificially making it so. This might be ok in some ways if it could be done with no cost, but setting us on a clear course for a wipe out by doing this the way they have is not exactly no cost. Nobody likes to be in a place where things are not going well, but part of life is ebbs and flows. It is my view that overall things turn out ok if we do the right thing in the long run and trying to force them to happen rarely works.
I am not going to get into all the deficit numbers and all of that crap, we all know them. I just think that from a base level of looking at things, I would prefer that prices naturally go to where they want to. I do not like the Wizard of Oz trying to force them to go to a specific place. History is full of examples of where these efforts by various governments have not worked and this time will not be different. If prices want to go down, they are going to. I know there are some readers here that are of the opinion that immediately shorting the indexes this morning is the obvious and as a result correct play, I do not agree.
I don't like trades that are obvious to everyone, because everyone does not trade profitably. Even if I did take on that premise, I do not have any sell signals in the indexes yet. I did show a projection the other day on a weekly chart that showed down, but that has not even gotten to the point where this weekly bar is closed. It showed that starting in about another week from now prices would begin a sharp decline. We have no idea at this point if that or the bond projections were right because we have not even reached the time frame from which the projections begin. Bonds appear to be breaking down big time here and bounces look like sells to me, so that projection at this moment does not appear to be correct since it showed a big bond rally.
There was a comment about those projections must be better than 50% or I would not use them. First of all, just better than 50% would not be enough for me, I require much more than that. Second, I have not really undertaken a thorough enough review of them to determine how accurate they are. This is why I said in the post, that they are not enough to just go out and trade from and that I only use them to see if they happen to support what else I am looking at. When I just look at daily charts of the indexes it is starting to look to me now like a sell is not going to setup for a while if it does at all, and that we are back in bull market mode once again. Weekly charts always look different, and that still tells me to look at this bounce as a sell. As a result I have no plays there at the moment since they are in conflict. Prices to appear to be moving toward the target I had so I guess I blew the exit in the Bernanke 2000 trade I put on earlier.
I would not urge anyone to just go out and short this market right now, the daily trend is now up again. It will be very interesting to see if this trend can carry on like it has been without another round of QE, I have no idea if it can or not. The one thing I am sure about is that if it cannot another one will be announced in fairly short order and also that the Regime will still be injecting money in other ways and just not calling it QE.
Have a great holiday