Dare to Compare – Could the End of QE Crash Stocks Like in 2010 and 2011?

The S&P 500 dropped 17% right after QE1 ended and 20% right after QE2 ran out? Will stocks crash again now that QE3 and QE4 have been completed? Here is the only visual QE history chart along with an unexpected conclusion.

QE1 ended on March 31, 2010. Shortly thereafter the S&P 500 dropped as much as 17.12%.

QE2 ended on June 20, 2011. Shortly thereafter the S&P 500 dropped as much as 20.76%.

Fed officials are expected to end asset purchases (QE3 and QE4) at the next FOMC meeting on October 28-29. Will stocks crater like they did in 2010 and 2011?

QE History & Comparison

QE1 started in December 2008 with $660 billion, was expanded by $1,050 billion in March 2009, and ended in March 2010.

QE2’s $600 billion asset purchase injection started in November 2010 and lasted until June 2011.

QE3 started in September 2012 at a rate of $40 billion per month.

QE4 started in December 2012 at a rate of $45 billion per month.

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Starting in January 2014, QE3 and QE4 have been reduced gradually by $5 billion per month.

QE3 and QE4 have already been wound down to combined monthly purchases of $15 billion, and Fed officials said they expect to end asset purchases after the October 28-29 meeting.

Will the QE3 and QE4 withdrawal shock the system (aka stock market) as QE1 and QE2 did?

QE After Shock?

I’m a visual person and find that a picture (or chart) really says more than a thousand words.

Here is a simple, visual explanation of the various QE programs. This is the only QE history chart on the web, and was originally published in the October 5 Profit Radar Report. QE1, QE2, QE3 and QE4 are illustrated by various shades of green, because green is the color of money (chart courtesy of the Profit Radar Report).

Illustrated are the monthly dollar purchases. Exact monthly asset purchase data for QE1 and QE2 is not readily available, so the amounts shown are based on total committed funds divided by the number of months the program was in effect.

QE3 and QE4 differ from QE1 and QE2 and two important ways:

1) The asset purchases under QE1 and QE2 were more significant than the asset purchases under QE3 and QE4.

2) QE1 and QE2 stopped cold turkey. The Federal Reserve obviously learned from the almost instant S&P 500 (NYSEArca: SPY) selloffs and equipped QE3 and QE4 with the ‘taper’.

Purely theoretical, the actual end of QE3 and QE4 could be a non-event, and should be much less noticeable than the end of QE1 and QE2.

Why Did the S&P 500 Just Lose 200 Points?

But, if that’s the case, why did the S&P 500 just lose as much as 200 points?

Investors may have simply sold stocks in anticipation of QE ending. Sometimes it’s all about mind of matter. If investors mind (that QE is ending) it matters, at least temporarily. In addition, the Dow Jones reached an important technical resistance level on September 17. The Profit Radar Report predicted that this resistance level would increase the risk of a correction.

It is undeniable that the various QE programs have driven asset prices higher. It would be intuitive to conclude that the absence of QE (at least sterilized QE) will send stocks lower.

But the stock market is not always intuitive and doesn’t conform to investors’ expectations.

Furthermore, despite the end of QE, the stock market has not yet displayed the classic pattern of a major market top, the kind of pattern that foreshadowed the 1987, 2000 and 2007 highs. Here’s what I mean: The Missing Ingredient for a Major Bull Market Top

In summary, I wouldn’t sell stocks just because QE is ending.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Even Central Banks are Forced to Buy Stocks

Talk about a classic catch-22. Central banks around the world are haunted by the very monster they created – low interest rates. This forces them to buy stocks. But, this is not the only reason for relentless stock market highs.

The low-interest rate environment is not only putting the squeeze on savers and retiree’s, it’s also forcing central banks to look for greener interest pastures.

Central banks are caught in a classic catch-22 scenario. To spark their economies, central banks have lowered rates.

This has cost central banks around the globe $200 – $250 billion in interest income. Some of those losses have been offset by reduced payments of interest on the liabilities side of the balance sheet, but nevertheless, bankers are haunted by the monster they created.

What can central banks do to boost their bottom line?

According to a study by the Official Monetary and Financial Institutions Forum (OMFIF), “a cluster of central banking investors has become major players on world equity markets.”

The OMFIF report identifies $29.1 trillion in market investments. This includes investments in stocks, like the S&P 500 (SNP: ^GSPC), and precious metals.

Based on research from 2013, central banks held $10.9 trillion of currency reserves, that’s about 20% of the $55 trillion market value of global stocks.

A survey of central banks, taken in 2013, revealed that 23% of polled central banks own stocks or ETFs – like the SPDR S&P 500 ETF (NYSEArca: SPY) – or intend to buy stocks or ETFs.

For example, the Swiss National Bank has an equity quota of 15% and is investing in large, mid-and small-cap stocks in developed markets worldwide.

China’s State Administration of Foreign Exchange, part of the People’s Bank of China (PBoC), manages about $3.9 trillion and has become the world’s largest public sector holder of equities.

Here is where the ‘rising tide lifts all boats’ analogy comes in.

The Profit Radar Report has persistently maintained that buying power behind stocks (a proprietary gauge of demand chasing stocks) remains strong.

The Profit Radar Report uses this proprietary buying power index to gauge the odds of major market tops and stated in March, April, May, June and July that the buying power is too high for a major top (continous buying power updates are available via the Profit Radar Report).

But central bank liquidity is not the only reason for continuous S&P 500 highs. There is another reason, one that is much easier to monitor and gauge than covert central bank buying.

The reason why the S&P 500 continues to rally without a major correction (1,000 days and counting) is discussed here:

The Only Indicator that Foresaw a Persistent S&P 500 Rally with no Correction

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Fed Fund Rate Suggests S&P 500 Rally

Here’s yet another indicator that the Federal Reserve legally ‘manipulates’ the stock market. This chart shows the correlation between the S&P 500 and the 30-day Fed Fund Rate. Based on this unique correlation, stocks should rally (at least temporarily).

Market correlations are never married for better or for worse or until death do they part, but they are valuable tools for market forecasters.

There are dozens of correlations. Some are logical and make sense, others are exotic and off the wall.

This piece is about the correlation between the S&P 500 (SNP: ^GSPC) and the 30-day Federal Funds Rate (30 FFR).

The Federal Funds Rate (FFR) is the interest for which a depository institution lends funds maintained at the Federal Reserve to other depository institutions.

The 30 FFR reflects the average daily FFR in a particular month and is investable via the 30-day Federal Funds Futures.

The Commitment of Traders Report (COT) provides a glimpse of how traders feel about the 30 FFR, and that’s where it gets interesting.

The COT tracks positions of commercial, non-commercial and non-reportable traders. Commercial traders are considered the ‘smart money.’

Commercial traders have been piling into the 30-day Federal Funds Futures, basically betting on a higher FFR.

The FFR essentially acts as the base rate that determines all other interest rates in the US.

There generally is a direct correlation between Treasury rates and stock prices. That’s what makes the 30 FFR an interesting forward-looking indicator.

How is it forward looking?

The chart below plots the S&P 500 against the 30 FFR shifted forward approximately 30 days or four weeks (the COT reports weekly).

The green portion of the 30 FFR chart reflects the outlook for the next four weeks.

The second chart shows the long-term correlation between the S&P 500 and 30 FFR.

It’s worth noting that commercial traders’ 30 FFR long positions are near an all-time high. Therefore, up side could be limited.

For now, the Fed Funds Rate confirms what we foresaw already last week: Higher prices.

My thoughts, shared via the May 4 Profit Radar Report, were as follows: “The chart detective inside of me favors a shallow dip to 1,874 – 1,850 followed by a pop to 1,9xx (exact level reserved for subscribers) before we see a 10%+ correction.

I expected higher prices not because the charts telegraphed it, but because of a non-scientific yet incredibly effective indicator. More details can be found here:

Too Many Bears Spoil the Crash (or Correction)

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Yawn and Pop or Drop – How the S&P 500 Reacts to FOMC Meetings

The most consistent side effect of the Federal Reserve’s FOMC meeting is a gigantic yawn … followed by an unpredictable pop or drop. Here’s how the S&P 500 reacted to all FOMC meetings over the past year.

The 12-member monetary policy making body of the Federal Reserve gets together eight times a year for a secret 2-day conclave.

Wall Street eagerly anticipates a carefully selected string of canned comments by the Federal Reserve chairman disbursed at the end of the meeting (usually Wednesday around 2:15pm EST).

Life on Wall Street is on hold until the Fed chairman (for the first time Janet Yellen) serenades the audience with her assessment of the economy.

The S&P 500 chart below highlights all FOMC meetings since the beginning of 2013 (yellow lines).

Do FOMC meetings affects stocks in a predictable manner?

The S&P 500 (SNP: ^GSPC) chart below shows all the FOMC meetings since the beginning of 2013 (yellow lines).

The most predictable pattern actually occurs before and during the FOMC meeting. What pattern? It’s about a two-day long yawn.

The blue boxes show prolonged sideways trading leading up to the conclusion of the meeting. There have only been two declines into the FOMC meeting (red boxes).

After the meeting the S&P 500 may pop, drop, or grind higher. There’s no direct link between FOMC decisions and the S&P 500 (aside from the obvious fact that QE is good for stocks over the long-term).

Here’s one interesting factoid you may sink your teeth into: When the S&P rallied into FOMC Tuesday, it was down on Wednesday 5 out of 6 times.

The S&P’s actual post-FOMC performance seems to depend more on other factors, such as the technical structure of the chart.

The green lines show that technical support stabilized or buoyed the S&P 500 at least three times, while the inability to stay above support contributed to the January/February correction.

The current technical picture is interesting as the S&P 500 dropped below support and the 20-day moving average on high volume last week, but struggled back above this week (on anemic volume).

Here’s a detailed analysis of what this – normally bearish price/volume pattern – means for the S&P 500 and SPDR S&P 500 ETF (NYSEArca: SPY) along with the resistance level, that – once broken – will unlock higher targets.

Short-Term S&P 500 ETF Analysis

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Fed Needs Help of its Worst Enemy to Unload QE Assets

Talk about a classic catch 22. The Federal Reserve has been buying Treasuries to depress interest rates and spark the economy. With a bloated balance sheet, the Fed needs the help of its arch enemy to unload assets.

1,273%. That’s how much the Federal Reserve’s balance sheet has mushroomed since 1990.

As of January 22, the Federal Reserve owns $2.228 trillion worth of U.S. Treasuries and $1.532 trillion worth of mortgage-backed securities.

Various other holdings bring the Fed’s balance sheet to $3.815 trillion.

The chart below provides a visual of the sharp balance sheet increase since 2008.

Buying those assets is the easy part, but how will the Fed unload them?

The Fed’s Enemy – Who?

The Federal Reserve engaged in massive quantitative easing (QE) to depress interest rates. Low interest rates forced investors into stocks and defrosted the frozen credit markets.

By extension, QE drove up stock indexes like the S&P 500 and Dow Jones (NYSEArca: DIA). Bernanke termed this the ‘wealth effect,’ which the Fed hoped would spill over into the economy.

The Fed’s biggest enemy is interest rates, rising interest rates to be exact. Particularly important is the 10-year T-note yield.

Rising interest rates make Treasuries and Treasury Bond ETFs like the iShares 20+ Year Treasury ETF (NYSEArca: TLT) more attractive than stocks.

Rising interest rates also result in higher loan and mortgage rates, which are speed bumps for the economy and real estate.

The chart below, published on December 12, plots the S&P 500 against the Fed’s balance sheet and 10-year Treasury Yields. Yields are inverted and the chart shows that the Fed has lost control over yields.

How The Fed’s Arch Enemy Can Help

The Federal Reserve is the biggest buyer and owner of Treasuries. The Fed can print money and buy securities all day long.

But, who will end up buying all the Treasuries the Federal Reserve has amassed? What happens when the Fed becomes the seller? The Fed can’t print buyers. There has to be a demand or the Fed (if possible) has to create a demand.

Irony at its Best

What makes Treasuries attractive? High yields, which ironically is exactly what the Fed is trying to avoid. High yields are bad for stocks and bad for the economy, but may be the Fed’s only hope to eventually unload assets.

There’s another caveat. High yields translate into lower prices. As yields rise, the Fed’s Treasury holdings – and Treasury ETFs like the iShares 7-10 Year Treasury ETF (NYSEArca: IEF) – will shrink.

Are there other alternatives? How about doing nothing and let the free market do its thing. Perhaps that’s what Bernanke and his inkjets should have done all along.

There is another problem largely unrelated to QE and the Federal Reserve. It’s ownership of U.S. assets (not just Treasuries).

We know that the Federal Reserve owns much of the Treasury float, but more and more U.S. assets are falling into the hands of foreigners. More and more U.S. citizens have to ‘pay rent’ to overseas landlords.

Here’s a detailed look at this economically dangerous development:

US Assets are Falling into the Hands of Foreign Owners at a Record Pace

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Unlikely Source Anticipated Stocks Radical Post FOMC Rally

Only 30% of Wall Street analysts expected the Federal Reserve to taper and most of Wall Street feared a post-taper meltdown. Who would have thought that stocks would melt up following the taper decision? This average Joe’s chart talk did.

I’m just an average Joe, a largely self-taught market analyst. I don’t even try to predict what the Fed decides to do at their FOMC meetings.

I can’t read minds (especially highly encrypted Fed minds), but I can read charts (at least so I’d like to believe) and share my interpretations of ‘chart talk’ primarily via the Profit Radar Report.

Here’s what ‘yesterday’s’ charts foretold about today’s performance for the S&P 500 and Dow Jones (DJI: ^DJI).

The December 15 Profit Radar Report featured charts of the S&P 500 (SNP: ^GSPC) and Dow Jones and stated that:

“The charts show that the support creating the ideal down side target is about 0.7 – 1% below current trade. A brief dip below the 50-day SMAs followed by a close back above would be a buy signal.”

Yesterday’s special FOMC prep Profit Radar Report summarized the expected outlook like this:

“With or without test of the 50-day SMA, odds favor overall higher prices. A move below the 50-day SMA followed by a close back above would be short-term bullish.”

A test of the 50-day SMA wasn’t absolutely necessary. Why? Because the Dow Jones and S&P 500 futures already touched their 50-day SMAs on Sunday night. (View chart and analysis here: What the S&P 500 and Dow Jones Did When You Weren’t Looking)

But, if a 50-day SMA test would happen, it would be bullish.

As the S&P 500 chart below shows, today’s post FOMC kneejerk reaction took the S&P 500 and S&P 500 ETF (NYSEArca: SPY) briefly below the 50-day SMA before soaring higher. The Dow Jones and Dow Diamond ETF (NYSEArca: DIA) did not test their 50-day SMAs.

Only 30% of Wall Street analysts expected the Fed to taper and almost everyone feared that such taper would cause a meltdown, not a melt up.

Who would have thought that a Fed taper would send stocks soaring? Charts did!

If you enjoy ‘chart talk’ from an average Joe market analyst, feel free to test drive the Profit Radar Report or click here for the most recent, free short-term forecast: S&P 500 and Dow Jones Short-term Forecast

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Federal Reserve FOMC Meetings Zapped Stocks 4 Times in a Row

The Federal Reserve has been very accommodating and assured Wall Street of its full support (no taper) each of the last four meetings. Nevertheless, stocks sold off every time. Will this time be a repeat?

Wall Street anxiously anticipates the outcome of this week’s two-day FOMC conclave.

Taper or no taper is the question … and it will be answered on Wednesday around 2pm EST.

Until then, speculations run wild.

I don’t participate in the speculation for two reasons:

  1. The market’s reaction is simply unpredictable (more below).
  2. Technical analysis usually provides some clues even before the Fed announces anything.

The timelines in the S&P 500 chart below mark all 2013 FOMC meetings.

The first three meetings of the year were near-term bullish for the S&P 500 and S&P 500 ETF (NYSEArca: SPY), but eventually gave way to new lows.

The last four FOMC meetings were all followed by immediate declines.

The September 18 meeting (blue dot) was followed by an exciting twist. Most of Wall Street and the financial media expected the Fed to announce tapering at their September 18 FOMC meeting.

Surprise! The Fed did the unthinkable and continued unbridled QE. The S&P 500 soared the day of the announcement and a few hours on the next day, but dropped lower thereafter.

More or less ignoring the Fed’s noise, the September 18 Profit Radar Report published the projection chart below and warned:

“The S&P 500 red resistance line will be at 1,735 tomorrow. A temporary decline from this line (around 1,735) followed by another rally leg to 1,750+ would make most sense (see projection).”

What about the July 31 FOMC meeting? The July 31 Profit Radar Report stated that: “The Nasdaq-100 and Dow Jones chart suggest a period of correction or consolidation.”

What do technicals say this time around?

Technicals allow for some near-term weakness and a test of the 50-day SMAs for the S&P 500 and Dow Jones (DJI: ^DJI). I favor the odds for a year-end rally, but with sentiment at multi-year bullish extremes, any move below support would caution of a sizeable drop.

A more detailed technical forecast for the S&P 500 and Dow Jones, along with a chart that highlights important support, is available here: S&P 500 and Dow Jones Short-term Forecast

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Federal Reserve Moves Sensationalized and Twisted by Blogosphere Paparazzi

The actions of the Federal Reserve may be a symbol for everything that’s wrong with American business and ethics. However, sometimes the ‘paparazzi’ go too far and vilify the Fed unjustly … at the cost of Mom and Pop investors.

Before we talk about the blogosphere paparazzi, allow me to set one thing straight: I don’d like the Federal Reserve and I’m not sticking up for the Federal Reserve.

The Federal Reserve is an institution set up by bankers for bankers, an insurance company for the bankster mafia.

However, an analyst, reporter, journalist, or blogger should be driven by facts, not personal biases or dislikes. Just because an institution has a closet ‘packed with skeletons’ doesn’t give us the right to invent misleading information.

It’s no secret that the Federal Reserve has been pumping money in the market, sending indexes like the S&P 500 and Dow Jones to never before seen highs; in the process enriching the very banksters that caused the worst financial collapse since the Great Depression.

The Federal Reserve is the deserving scapegoat for many wrongs committed on Wall Street.

But publishing sensationalized and misleading reports just for the sake of capturing attention is bad for investors. How so?

Just recently, a very popular blog stated that “QEternity may have to be increased by 50% in the coming year.”

This claim was based on a tweet by the president of the Chicago Federal Reserve, Charles Evans (see original tweet below):

According to Evans’ tweet, the Fed may need to purchase $1.5 trillion in assets until January.

How Does $1.5 T Compare to Current Asset Purchase Pace?

Based on the assumption that the Fed is buying $85 billion worth of bonds per month ($1.02 trillion/year), we can see where the 50% increase claim is coming from.

However, the haphazard calculation overlooks the fact that the Federal Reserve is ALREADY spending an additional $25 billion per month on reinvestment of maturing bonds. Is that what Charles Evans may have meant?

Mortal humans just don’t have the ability to decode the enigma-like messages of Federal Reserve personnel, but based on the numbers in Evans’s statement it could mean that asset purchases will continue at the same pace or that asset purchases may only increase 26% – $85 b x 14 (November 2013 – January 2014) compared to $1.5 trillion.

This conclusion is less sensationalistic, but it won’t persuade investors to buy into the S&P 500 or Dow Jones just because the Fed may beef up asset purchases.

It’s not necessary to ‘enhance’ Federal Reserve news to make them more interesting. The Federal Reserve is quite capable of making fools of themselves without anyone else’s help.

For example, an official 2012 Federal Reserve study (posted on the Federal Reserve NY website) revealed that the Fed’s FOMC meetings drove the S&P 500 55% above fair value and that the S&P 500 (NYSEArca: SPY) would be flat since 1994 if it wasn’t for the Fed (click here for report: Federal Reserve Study: FOMC Drove S&P 500 55% Above fair value).

In direct conflict with the above study, a recent official report by the Federal Reserve of San Francisco claims that the Fed’s QE barely affected stocks and the economy (click here for report: Federal Reserve Reflects Responsibilty for Stock Market Overvaluation)

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 (SNP: ^GSCP) and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Most Important Number in Finance is Slipping Out of the Fed’s Control

The Federal Reserve is the most powerful financial institution in the world and yet it is like the emperor without clothes. Ironically, the very force the Federal Reserve is most afraid of may be the only thing to save the Treasury.

Mirror mirror on the wall, what is the most powerful financial institution of them all?

The S&P 500, Dow Jones and pretty much all other markets seem to dance to the tune of the QE rhythm … and yet the Federal Reserve resembles the vain king portrayed in Christian Andersen’s “The Emperor’s New Clothes.” How so?

Rogue Interest Rates

The chart below shows the Federal Reserve’s monetary base sandwiched by the S&P 500 and the inverted 10-year Treasury Yield (Chicago Options: ^TNX).

The purpose of the chart is to show QE’s effect (or lack thereof) on stocks (represented by the S&P 500) and bonds (represented by the 10-year Treasury yield).

The 10-year Treasury yield has been inverted to express the correlation better.

I’ll leave the big picture interpretation of the chart up to the reader, but I have to address the elephant in the room.

Since the Federal Reserve stepped up its bond buying in January, the 10-year yield hasn’t responded as it ‘should’ and that’s very odd (the chart below shows the actual 10-year yield performance along with forecasts provided by the Profit Radar Report).

As of December 5, 2013, the Federal Reserve literally owns 12% of all U.S. Treasury securities and by some estimates 30% of 10-year Treasuries.

Icahn More Powerful Than Fed?

The Federal Reserve basically keeps jumping into the Treasury liquidity pool without even making a splash. If Carl Icahn can allegedly drive up Apple shares (with a 0.5% stake), why can’t the Fed manipulate interest rates at will?  This is just one of the many phenomena that makes investing interesting and keeps the financial media in business.

Conclusion

We do know why the Fed wants low interest rates. Rising yields translate into higher mortgage rates, and a drag on real estate prices. Eventually higher yields make Treasury Bonds (NYSEArca: IEF) a more attractive investment compared to the S&P 500 (NYSEArca: SPY) and stocks in general.

Ironically, what the Fed is trying to avoid (higher yields) may be the only force to save the U.S. Treasury. How can the Federal Reserve ever unload its ginormous Treasury position without the help of rising interest rates?

The emperor without clothes maintained his dignity (at least in his mind) as long as everyone pretended to admire his imaginary outfit. Perhaps a market wide realization that the Federal Reserve isn’t as powerful as it seems may ‘undress the scam.’

Regardless, the Fed’s exit from bonds would likely be at the expense of stocks, a market the Federal Reserve has been able to manipulate more effectively than bonds.

The Federal Reserve owns 12 – 30% of the U.S. Treasury market, but how much of the U.S. stock market has the Federal Reserve financed?

This stunning thought is explored here: Federal Reserve ‘Financed’ XX% of all U.S. Stock Purchases

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

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