When the F_E_D first announced QE 13 in September, I got so many emails from members telling me, "Don't fight the Fed", "Why aren't we closing our shorts" and I told them that we do things based on evidence, not based on market mottos, not based on fear, not based on what happened in one situation when this situation is totally different.
I thought we should remain calm, not make any knee jerk decisions and collect the evidence and make a decision based on the evidence.
What happened on September 13th (the announcement of F_E_D M.B.S. buying or QE 3) and 14th is something I ALWAYS warn about before any F_E_D or F_O_M_C policy statement and that is...
BEWARE THE F_E_D KNEE-JERK REACTION EFFECT!!!
I wouldn't say it if I didn't see it so often. Here's the knee jerk reaction from the announcement of QE3 from September 13th...
*All charts are of the S&P-500
As the market went higher I reminded members of the F_E_D 'Knee-jerk" effect in which the initial reaction is almost ALWAYS the wrong reaction.
I felt the pressure of "Don't fight the F_E_D and clearly remember QE1 and 2 ramping the market, I even said to members, "Emotionally I feel like I want to close all shorts and go 100% long, but I can't make decisions based on emotion, they must be based on fact and highest probabilities.
The next day, Sept. 14th, the market started to move even higher, members were really panicking, I still said we must gather facts and make decisions based on facts we can observe.
Here's QE3 at the white arrow and the downtrend that has dogged the market since until our recent positive divergence at the lows of 11/16 , which is the same move I'm looking for to complete the downside target and then probably put together a stronger move.
The things to consider include QE1 in 2008 didn't work well when it was M.B.S. buying by the F_E_D only, it wasn't until the F_E_D announced they'd buy Treasuries too that the market took off in 2009.
The original QE3 statement was for M.B.S. and the continuation of the maturity extension program.
"The Federal Reserve will amplify record accommodation tomorrow by announcing $45 billion in monthly Treasury buying that will push its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists."
"Forty-eight of 49 economists predict the Federal Open Market Committee will purchase Treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month. The panel pledged in October to continue that plan until the labor market improves “substantially.”"
You can read the rest of the article.
Things to consider include the fact that on of the reasons I felt the announcement of QE3 would not send the market higher like it did in the past was because the market already expected it; both QE1 (or at least the Treasury buying part) and QE 2 were unknowns to the market, it sounds like once again the establishment knows or has felt Treasuries would be added so there's the same chance that it's already discounted in market price and we just see crazy volatility to take money from retail that thinks Wall St. is just reacting to the news, they aren't.
The other thing is the situation across the world is much different now than QE1 or 2 or even Twist.
Inflationary concerns (which is one of the biggest products of QE) could severely damage the economy.
While there are dozens of things that should be considered, the last is this.... The F_E_D is looking for a way to change their yard stock for asset purchases. Up until now and even now, the f_E_D has given dates, such as "ZIRP policy will remain in effect until April 2015".
The market loves that because they know exactly what to expect, what the market hates is uncertainty. The F_E_D has been talking a lot about making asset purchases contingent upon the incoming economic data, that takes away all certainty, it makes more sense, but Wall Street doesn't like it and when Bernie was questioned about it, that marked the high of the day, that exact minute, that means the market didn't like the F_E_D's new policy yard stick they are trying to create, this could cause even more disruption to the markets if the F_E_D talks more about moving toward that system.
If you are smart money and know a policy will be in effect until an exact date, you can make all kinds of plans, but if you don't know if next week's Non-Farm Payrolls may substantially change the size and makeup of F_E_D asset purchases, you don't want to be the guy loaded for bear when the music stops.
So it's not as simple an affair as people think.
The same quick pop up and reversal down I said I was looking for last night that started in the market today, can be created the exact same way or in the manner I expect via the F_E_D knee-jerk mechanism.
I do have to take my wife to the airport tonight as she will return to her native country, Hungary., to receive medical attention as her mother is a doctor there, so I will be positing my wrap tonight, but it will be late.
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