QE is mantra rather than driver

This is widely presented as the only chart that matters:

31jul10

Or like this:

31jul3

Namely, that QE has been the driver of the stocks bull market and its corrections, and the Fed is in control.

Yet, if we take a bigger picture view of the correlation it doesn’t look so compelling:

31jul4

Furthermore, the two corrections of 2010 and 2011 took place once we hit typical topping levels of bullishness, overbought indicators and divergences.

31jul8 31jul5 31jul2 31jul5Additionally, the stocks bull market took off at the solar minimum and, subject to confirmation, is topping out at the solar maximum, in line with history, rather than it being a Fed-induced bull market by QE.

31jul9Lastly, here is Japan’s initial QE programme in the early 2000s. It did not prevent 43% falls over its first year.

31jul1

Japan’s most aggressive programme yet, Abenomics 2013-2014, has also thus far failed to produce equal results in the economy and stock market.

In short, QE is overhyped. We would have had a bull market anyway from solar minimum to solar maximum. The corrections of 2010 and 2011 would have happened because of excess bullishness, overbought and technical indicators and divergences. Rather, the wealth effect of stock market strength into 2010 and 2011 aided the Fed in stopping QE, and their corrections in restarting it. QE was coincident or even lagging. The first two charts in the post look convincing, but under scrutiny are less so.

I am not saying QE is impotent, but it is not the driver for this stocks bull. ‘Fed policy trumps all’ is instead the mantra for the stock market mania into 2014, just as ‘valuations revised from profits to expectations’ was the mantra for the stock market mania into 2000. In fact both were solar maximum induced manias, and both excuses for extreme overvaluations. The sun did it, not the Fed or the revolution of the internet.

What has then QE achieved? Shoring up bank balance sheets, shoring up confidence, pressing down treasury yields, helping create asset bubbles around the world. As I’ve argued before, the Fed can delay the full impacts of demographics but it cannot overcome, and it is still subject to the solar cycle, not agent. In keeping with that, we have seen a broad range of topping indicators congregating at the solar maximum and I await the validation that passing through that maximum is all that was required to peak and then kill the stocks bull, regardless of what the Fed is doing.

Short term: yesterday we saw a doji candle in the markets and few clues from the indicators, so need to see how today plays out.

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34 thoughts on “QE is mantra rather than driver

  1. Very well constructed article. I have been studying patterns for many years and very much believe that the market goes according to much more profound markers than QE as you stated. In fact almost monthly some ‘news’ is ascribed to a market move that the patterns had in their sites weeks or days ahead of this ‘news’. This happens every time without exception. It amazes me Amazes me still.

  2. Thanks John. Another great article and a great slap on the back of the head to me to keep focused on what the evidence amd research you have provided over the months as to what really drives the market.

    I’m glad I stayed long volitilty yesterday, despite my doubts, futures are getting clobbered.

    Cheers

  3. The double top/failed breakout on the Russell is looking pretty ominous now. It’s currently testing its 50 week moving average, which has been a good bounce point during this bull market.

    Thanks John. Really enjoy your perspective.

  4. Great study. Misdiagnosis of cause and effect is going to put markets into total confusion/chaos. People won’t know the value of anything, when it is realized that fed intervention only causes wealth class warfare, and can’t tweak our way out of systematic failure.

  5. One interesting time to focus on is September 17th, which is of course the final FOMC press conference that should finish the QE taper.

    There are a couple interesting elements of time work that relate to September 17th. One is that it is 55 calendar days from the standing July 24th high. 55 calendar days is the Gann Panic Window timeframe that matches (-1day) the periods of the ’29 crash and ’87 crash. So this would fit John’s waterfall scenario well.

    The second is that there is a plethora of timing work that supports September 17th as being important. One piece for example is the exact 61.8% time extension of the March 24th 2000 high to the March 6th 2009 low.

  6. Thanks John. Great work! I just wanted to add, if we view the SPX chart from a pattern perspective only, the July 3 high was a 5 legger and the July 24 higher high appears to be a 3 legger. This suggest the July 24 high may have been a “B” wave of an abc wave 4 correction. A correction that should be targeting 1925ish + or – spx, (wave 4 of previous degree).
    What all of this means is that the upcoming low ( probably in the low 1920’s spx) might be the completion of a wave 4 correction. If it is, a wave 5 up will follow. The wave 5 can make a new all time high if it chooses to do so. If it is the final 5th wave of the bull market, it could also unfold as a weak 5th failure.

    1. Great:) I was expecting a pullback to 1900/1925 wave 4, but with the current move as an impulse I thought I am wrong.
      Your count explains it and fits perfect with my plan:) Thanks:)

  7. Great day today. Long may this continue. Need a bit more of this before we can confirm it’s the start of the decline. I do expect a retrace at some point but hopefully it will hit 16000 before maybe rising to 16400 then down to 15000ish. Then it will be deciding whether this is a correction or a bear market.

  8. great work John. Your 1937 analogy seems right on time aligned with your seasonal geomagnetic chart. Target could be a 40% move down into November in the frothier compartments such as the Russell and Biotech.

  9. Technical damage yesterday and normally should have a lower low ahead. I would wait for bounce tomorrow or next week (a bounce high in coming week) and target 1900.
    Will not fall in love to downside at the moment as big giant is having the ipo in coming month and big manipulator will not allowing this.
    Meanwhile DAX correction meet fist target when you take 2014 1/1-2/4 as reference.

  10. DOW unlikely to give a major fall and is likely to bounce back furiously from 16200-16400 range and move rapidly towards 18000-18300 in the next few weeks.Just my 2 cents.

      1. The internal structure as well as the waves just don’t add up.More like a shake off prior to the rapid jump up towards DOW 18000-18500 over the next few weeks.

  11. Great stuff, as always, John. I am full of admiration that you have stuck with your theme through this (another) irrational market phase. We may be entering ‘interesting times’!

  12. The futures are currently getting clobbered and I mean clobbered. It is a worse set-up going in today than it was at this point yesterday.
    What I find interesting was the amount of analysts calling for a sizeable bounce last night and today after yesterdays disaster, even the most bearish ones.

    if we go into this weekend with another three digit decline on the DOW that could set-up Monday/Tuesday next week for a 87 style collapse.

    It also interesting to note that the DAX which has basically been the leader ofthe world’s major indices is now crashing below all support levels. That is indicative of a major crash underway.

    I suspect the trigger for Germany were the sanctions against Russia. The west may have got far more than it bargained for.

  13. Just an observation that may be biased or ‘fooled by randomness’ but this is something Iv’e noticed over the years. One of the best risk/reward setups is taking a short position on a Thursday on the bet that it will be a big down day to be followed by further big down days on Friday, then again on Monday. The problem with this setup of course is picking the right Thursday. Yesterday was one of those days; but then again the problem is seeing it coming. My 2-cents.

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