Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Quantitative Easing: The Greatest Con Ever Sold


It would seem that QE is just a PR stunt to engineer inflation expectations and animal spirits.

As far as I can tell there is absolutely zero correlation between the amount of Treasuries the Fed owns and the level of interest rates. For instance, in 1970 they owned 21% of the stock and the 10-year yield was at 6.50%, but in 1980 they owned 16% and the yield was 12% while in 1990 they owned only 9.5% but the yield was 8.0%.

Why should we assume that the Fed has been successful in lowering interest rates, or that they would be able to hold them down if the market were ready to turn? Buying $5 billion/day in a market that trades $500 billion isn't going to cut it. The fact of the matter is that bond yields are low because the economy is weak and there is no demand for money. When interest rates rise in an environment where economic growth is decelerating, bad things can happen -- just like in 1987.

I am not some crash-calling perma bear like many others who have been getting their brains beat in by this rally. In fact I was looking for new all-time highs and a melt-up back during the summer of last year.

On June 12 in Trading the Wrong Playbook Bubble I pointed to the significance of holding the historic 1265 pivot level while many in the speculative community were positioned for another crash:
I had this pivot area not only because it represents last year's double bottom prior to the August crash, but it also represents the low after Bear Stearns imploded in March 2008. If this market truly is just back-filling the gaps left behind by the financial crisis then making this area of support is very bullish and could point to new all-time highs going into the fall.

Then just over a month later on July 30 in Bernanke's Astonishingly Good Idea I again pointed to the negative sentiment and short base as a catalyst for a melt up rally:
Last year the speculative community was still long the QE II reflation correlation trade thinking they were going to get an extension and when they didn't it was Katy bar the door. This year they are short. If we don't crash soon when the boys come back from the beach they may be piling in to get long before year end. It could be melt up city.

ES COT Large Specs Net Position

Looking at the nature of the positing vs. the price, it's pretty clear to me this is what has happened. What could be different about their assessment of fundamental conditions between then and now? The fact is this rally has not been on the back of improving fundamentals; it's been on the back of a massive short squeeze in the speculative community. With the short base cleared and newfound bullish sentiment suggesting extreme confirmation bias I am beginning to think the risk has overwhelmingly shifted to the downside.

This is not something I take lightly, and I invoke 1987 in all seriousness. The very fact that it is considered "silly" is exactly why it can happen. Markets don't crash because everyone is expecting it; they crash when people think they can't go down.

In 2006, as I was trying to short the market, a wise trader and eventual mentor said to me: There will be no bears left when this market tops. This was invaluable advice and it has kept me on the right side of this rally for a long time, but I am starting to see the sentiment turn. With each little poke to new highs, more and more bears are dropping like flies; body bags are indeed piling up high along capitulation row. After looking to get long at 1265 in anticipation of an explosive rally to new highs I am now looking to get defensive as I think this rally is in the process of completing what will prove to be a cyclical rally in an ongoing secular bear market.

S&P 500 Weekly Count

I want to now take a look at my working Elliot Wave count of the S&P 500, which has served me well since the 2009 lows and should be considered a potential scenario. The count has been evolving and the main thing I want to emphasize is where the count changed into what I believe no one sees. The basic premise and most important objective in counting markets is determining whether you are impulsing or correcting. Generally markets impulse with the trend in five waves and correct against the trend in three waves.

I initially had the first leg of the rally out of the 2009 hole as an impulse wave 1 and the subsequent correction as a corrective 2 wave. However as we rallied out of the 2011 hole the market should have been embarking on the powerful wave 3 up. The first move satisfied the impulse, but as the rally unfolded it took on a more grinding nature exhibiting 3s up rather than explosive 5s. I also concluded that the 2011 leg up wasn't a 5 wave impulse but rather a Fibonacci .618 extension b wave in a larger B. I changed my 2 to the extremely rare "running flat" B. Realizing the ensuing rally would be a C I started mapping a diagonal.

Thus far the rally has unfolded in a near perfect diagonal and this week we finally got the needed e wave "throw over" of the upper end of the rising wedge. You can see my "e" label was a bit early, but what I have been looking at may have happened last week. That the "throw over" is occurring as the weekly RSI has finally made it to the ceiling is further evidence that the rally is in the late stages.

If I am correct we are very close to finishing a 3 wave ABC corrective move off the 2009 low. This has major market implications. With in the larger trend it's quite possible we could have finished a larger B wave up with the 2009 low completing an A wave. The ensuing C wave move lower could be a spectacular collapse. You might even call it a crash.

Twitter: @exantefactor
No positions in stocks mentioned.
Featured Videos