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What Was the Single Word Bernanke Said That Proves QE3 Is Here?


Jeff Saut finishes an interrupted thought and comes to a startling conclusion.


I too would have liked to hear Mr. Bernanke say, "As economic conditions normalize and oil prices inflate, QE can become dangerously counterproductive." Alas, that was just not to be. To the gasoline point, I was quite vocal about gasoline prices when they were declining. Now, however, they are rising, and they are rising materially. In previous missives, I have mentioned that every penny decline in gasoline prices puts another billion dollars into the hands of consumers. Of course, the reciprocal is also true and we are currently experiencing the highest gasoline prices ever for a Labor Day holiday ($3.80/gallon national average). Obviously, this is a headwind for the economy, as well as the stock market. And maybe that's why many of the stock market's internal metrics have begun to weaken.

To be sure, buying power has been waning recently and the advance/decline line is not confirming the upside in the major averages. Moreover, last week "they" started running the laggards, which is typically a sign suggesting a trading top is close. Indeed, of all the indices I follow the only ones that were positive last week were the lagging indexes, namely the S&P 400 MidCap, the S&P 600 SmallCap, and the Russell 2000. Meanwhile, "smart money," that would be commercial hedgers, are nearing their largest short sale position in eight years. Taken in conjunction with Bespoke's election year chart, which is calling for an intermediate trading top around September 7, I think it is time to counsel for caution. If I could script this week's trading pattern, it would be for a decisive upside breakout above the 1420 – 1422 (basis the SPX), a level often mentioned in these comments. That breakout would be followed by a surge to somewhere between 1450 and 1477 that gets everybody excited, as well as "long" stocks, just in time for a trading peak late this week or early next week. If Bespoke's chart continues to telegraph the future, the anticipated near-term peak would subsequently give way to a decline into mid/late October followed by another rally that carries the SPX out to new all-time highs.

The call for this week: Ben Bernanke's word change from could to will is significant. The statement now reads: "The Fed will provide additional accommodation as needed" instead of "The Fed could provide additional accommodation as needed." The implication is that QE3 is ready if needed. Certainly gold thinks QE3 is coming given Friday's leap of about $30 per ounce followed by another $7.00 gain this morning. If past is prelude, gold's surge is pointing the way higher and stocks should not be too far behind. Again, if I could script it, look for an upside breakout above 1420 – 1422 (basis the SPX) that is followed by a surge to somewhere between 1450 and 1477 that gets everybody excited, as well as "long" stocks, just in time for a trading peak late this week or early next week.

No positions in stocks mentioned.
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