These Markets are Telling Bernanke that QE Hasn’t Worked for Years

‘Don’t fight the Fed,’ has been a convenient way to explain rising prices across the board. It’s even true as far as stocks are concerned, but there are other – even more important markets – that are openly defying QE. Begging the question, when will the hammer hit stocks?

It’s not widely publicized, but Bernanke’s QE bazooka has had some spectacular misfires.

The only market that’s recovered after every misfire is equities. If you look at the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) you’ll see about one misfire (at worst a 20% correction) per year followed by a strong recovery.

QE had done its job as far as equities were concerned, but it looks to be a ‘one trick pony.’

The same ‘medicine’ (or drug) that’s doing wonders for stocks is causing nausea (or hangover) for other asset classes. Which ones? How about gold (NYSEArca: GLD), silver, and long-term Treasuries (NYSEArca: TLT)?

The chart below is a side-by-side demonstration of QE’s failure to launch gold, silver and Treasuries. Charted is the performance of the corresponding ETFs (GLD, SLV and TLT) during their respective crashes.

From September 2011 to June 2013 gold prices fell 38.85%. From April 2011 to June 2013 silver lost a stunning 63.42% and the iShares Barclays 20+ Year Treasury ETF (NYSEArca: TLT) is down 22.70%, since its July 2012 high.

Why? Gold and Silver

The Fed was still priming the pump in 2011, 2012 and 2013 and investors were still concerned about inflation. The same forces that drove prices to all-time highs persisted when prices hit an air pocket. The inexplicable happened!

Why? 30-year Treasuries

Treasury yields – in particular the benchmark 10-year note (Chicago Options: ^TYX) – have a huge economic impact. It’s the financial power horse that carries the economic carriage.

That’s why the Federal Reserve has been buying trillions of dollars worth of Treasuries to keep yields down. The 10-year Treasury yield is the highest it’s been in over two years. The inexplicable happened!

Why did gold and silver crash? Why are Treasury yields rising and bond prices falling?

This common sense analogy comes to mind: Another fix (aka more QE) for a junkie (aka banks) only postpones the inevitable.

How long will it be before stocks get hit by the inexplicable inevitable?

A stock market ‘event’ may not be too far off. In fact, via a series of recent studies, the Federal Reserve has started the process of officially denying liability and preparing Americans for a possible market crash.

This study is the most interesting of all: Surprising New Fed Study – Is it Preparing Americans for a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF.

 

 

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Wall Street Analysts’ Forecasts Surprisingly Accurate – Next Target: S&P 1,575

Here’s a surprise: Wall Street forecasts haven’t been optimistic enough to keep up with stock prices. That’s right, the S&P would actually have to drop about 5% to “catch up” with analysts’ target prices.  This sounds bullish, but it’s not.

If you’ve read my articles before you know that I like to poke fun at Wall Street analysts and use them as a contrarian indicator for stock market analysis. Most of the time that’s pretty easy, because they are wrong more often than right.

Wall Street is always way to optimistic, but something changed a couple of years ago (we all know what changed, more about that later). Surprisingly the one-trick pony rosy forecasts have been pretty spot on. Despite three serious correction since 2009, stocks eventually recovered to reach and surpass analyst estimates.

According to Bloomberg data, the average year-end price target for the S&P 500 is currently around 1,400, about 2% below current prices (a few days ago it was 5% below). Stocks will actually have to drop to get in line with analysts forecasts, that’s rare.

One would think that’s bullish from a contrarian point of view, but it isn’t.

Forecast Mean Reversion Ahead?

Lets look at prior examples when analyst forecasts weren’t bullish enough to keep up with the stock market. Analysts’ forecasts also trailed stocks before the 2000 and 2007 market top, in late 2009, late 2010 and early 2012.

Each prior instance occurred before a sizeable top. The S&P 500 didn’t decline immediately, but several months later any gains were given back every single time it happened (going back 13 years).

Goldman Sachs’ chief US equity strategist, David Kostin, sees the S&P 500 at 1,575 by next year. Oppenheimer’s John Stoltzfus sees 1,585, Bank of America’s Savita Subramanian sees 1,600 and Citigroup’s Tobias Levkovich expects 1,615.

The numbers seem somewhat arbitrary to me, but the common denominator of 15 predictions tracked by Bloomberg is the expectatian of new all-time highs. Is that too much groupthink?

It just might be. In February 2009, a similar cohort of analysts rapidly ratcheted down their end of year price targets and earnings expectations. Stocks bottomed in March and haven’t looked back since.

From blunder to crystal ball, what change made one-trick pony Wall Street analysts look like geniuses?

The non-scientific but accurate reason is QE and other liquidity shenanigans facilitated by the Federal Reserve and ECB. Forecasting a Fed supported market has proven to be like forecasting weather in a green house. Always warm, always dry, and mostly sunny.

Ironically history suggests that periods of accurate or too low analyst predictions tend to lead to some sort of top. Poor analysts, they just can’t earn credibility. Fortunately for them Wall Street bonuses are the highest they’ve been in years.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Insider Selling of Stocks is at Highest Level for the Year

Insiders are fearful of an impending sell off. When this happened earlier this year the S&P 500 quickly declined 10%. Other sentiment measures are reaching extremes too, but there’s a silver lining.

All major U.S. stock indexes continue to trade near multi-year highs, but insiders are selling stocks of the companies they own or manage at a pace not seen at any other time in 2012.

Investors Intelligence reports eight sales for each purchase and considers the current rush for the exits “panic selling.” The question we should ask is, “what do insiders know that we don’t?”

Another sentiment extreme can be seen in the high yield bond market, more appropriately called junk bonds. Companies just issued the third-highest amount of junk bonds.

The prior records were set in October 2010 and May 2011. Those two dates are marked in the chart below. I’ll explain in a moment the significance of those two dates.

Mutual fund managers tracked by the National Association of Active Investment Managers report that managers have a median exposure of 95% to equities. This is close to a six-year high and sets an 18-month record.

The Dow Jones just went an entire quarter without losing more than 1%. Jason Goepfert with SentimenTrader took a look at what happens historically when the Dow goes an entire quarter without a 1% decline, while trading close to a 52-week high.

There were 16 such instances since 1900. Over the next six months, the Dow was positive every time with a median return of +6%.

Getting back to the two dates highlighted in the chart above, we are currently in a situation where sentiment is becoming extreme. But just as Advil covers up pain, QE3 tends to neutralize extreme optimism.

Back in October 2010 it took several months before sentiment extremes caught up with stock prices. In May 2011 however, it resulted in a nasty sell off.

From a seasonal perspective October is an interesting month. It has hosted a number of crashes but also a number of important lows.

Looking at stocks, we see that the S&P 500 (S&P 500 SPDR – SPY) has been trading in a well-defined parallel trend channel. The strategy – as long as the S&P remains within this channel – is to sell when it reaches the top of the channel and buy at the bottom.

Once the bottom (of the channel) falls out, it’s probably time to become more bearish.

The Profit Radar Report monitors literally dozens of sentiment gauges, seasonal patterns, and technical developments to identify high probability investment opportunities for the best investment strategy.