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.



SPY vs TLT – Chart Shows Trouble

Years of rising prices have conditioned investors not to fight QE. The recent stock market correction was expected and is nothing out of the ordinary, but the performance of Treasury should raise eyebrows.

Are the days of “Don’t fight the Fed” over?

Obviously it’s too early to tell, but a comparison between the SPDR S&P 500 ETF (SPY) and the iShares Barclays 20+ Year Treasury ETF (TLT) reveals a new twist.

Long-term Treasury bonds might be telling the Fed: “The QE gig is up!” Why?

Stocks and bonds generally have an inverse relationship. When stocks go down, bonds go up and vice versa.

The blue boxes in the chart show that TLT rallied every time SPY declined by more than 5%. Since early 2010, when investors dumped stocks, they stocked up on bonds. When confidence in stocks ebbs, confidence in bonds flows.

This time is different!

Since the May 28 high, SPY has fallen as much as 7.9%. At the same time TLT has lost as much as 9.1%. Yes, long-term Treasuries got hit harder than stocks.

What does this mean? In short, it’s a warning shot across the bow.

The Federal Reserve has been funneling QE-money into purchases of its own Treasuries. This (until recently) has kept prices afloat and interest rates low.

The fact that investors are dumping Treasuries despite falling stocks is an early warning sign that they have lost faith in the Federal Reserve’s ability to artificially prop up prices.

It is said that bond investors are smarter than stock investors and bond investors seem to have lost trust in the Fed’s QE. If bond investors’ suspicion spills over into the stock market, watch out.

Weekly ETF SPY: TLT – 30-year Treasuries

Will falling Treasury prices be the beginning of a higher interest rate environment? Banks would hate that kind of tinkering with their easy money spigot, but retirees would love it. Here’s a comprehensive look at Treasury prices and yields.

On May 3, we highlighted a bullish breakout for the stock/bond ratio, which implied higher stock and lower bond prices.

Since then, 30-year Treasury prices have suffered the worst decline in quite a while. What’s next for long-term Treasury prices?

Chart #1 shows the performance of 30-year Treasury futures, the purest representation of 30-year Treasury prices.

Prices have broken through two important support levels/ranges (red line, bar), which has taken all the steam out of the up trend.

There are some support levels near current prices. This should cause a recognition bounce, but lower prices seem likely. RSI is closer to a new low than Treasury prices, which suggests that selling is broad based.

Things looked more promising two months ago at the bullish breakout (green circle). On March 17, the Profit Radar Report wrote that: “With prices back above trend line resistance the move may be strong enough to lead to higher prices. A small pullback to about 142.18 would provide a lower-risk entry point compared to chasing prices.” The pullback to 142.18 occurred the next day.

The April 28, Profit Radar Report warned that a close below 147.18 “would be the first red flag.” Even more, it was the beginning of the end, at least for the previous rally.

The chart of the iShares Barclays 20+ Year Treasury ETF (TLT) looks slightly different, but sings the same song of worry. Chart #2 shows TLT hovering aimlessly between support and resistance.

As Treasury prices decline, yields rise (and vice versa). This inverse relationship makes it interesting to also take a look at 30-year Treasury yields, illustrated by chart #3.

Yields are sandwiched right between red trend line resistance and green trend line support. Yields have not yet broken above long-term trend line resistance. A close above 3.16% is needed to confirm the breakdown in prices.

Summary: Long-term Treasuries are likely to see lower prices, but I would wait for confirmation in the form of a bullish yield breakout.

Is QE3 a Big Fat Buy Signal for Stocks?

It’s official, QE3 is here. Unlike QE1 and QE2, which had a predetermined ceiling and expiration date, QE3 is open ended. The Federal Reserve pledges to buy $40 billion worth of mortgage backed securities (MBS) per month for as long as it takes.

Investors got what they wanted, so is this a big fat buy signal for the S&P 500, Dow Jones, gold, silver and all other assets under the sun?

To answer this questions we will analyse the effect of previous rounds of QE on stocks (some of the details may surprise you) and compare the size of QE3 to its predecessors.

QE Like Snowflakes

Just like snowflakes, no day in the stock market and no version of QE are alike. Nevertheless, a better understanding of QE1 and QE2 may offer truly unique iinsight about QE3.

The chart below provides a detailed history of QE and Operation Twist (detailed dates are provided below).

QE1 Review

The S&P 500 (SPY) dropped 46% before the first installment of QE1 was announced (the Financial Select Sector SPDR ETF – XLF – was down 67% at the same time). By the time QE1 was expanded the S&P was trading 51% below its 2007 high.

Even without QE1 stocks were oversold and due to rally anyway (I sent out a strong buy alert on March 3 to subscribers on record). One could say that the Fed’s timing for QE1 was just perfect. The S&P rallied 37% from the first installment of QE1 (Nov. 25, 2008) and 51% from the expanded QE1 (March 18, 2009) to the end of QE1 (March 31, 2010).

QE2 Review

The S&P lost 13% from its April 2010 high to August 28, the day Bernanke dropped hints about QE2 from Jackson Hole. The S&P rallied 18% (from the July low to November 3) even before QE2 was announced.

The market was already extended when QE2 went live, but was able to tag on another 11% until QE2 ended on June 30, 2011.

QE3 Projection

Even before QE3 goes live, the S&P has already rallied 33%. Although the S&P saw a technical break out when it surpassed 1,405, the current rally is in overbought territory.

The timing for QE1 was great and the S&P rallied 37 – 51%.

The timing for QE2 was all right and the S&P rallied 11%

QE3 doesn’t have an expiration date, but is limited to $40 billion a month. During QE2 the Fed spent an average of $75 billion a month on bond purchases in addition to the $22 billion of reinvested matured bonds. Operation Twist is still active, where the Fed is selling about $40 billion of short-term Treasury bonds in exchange for long-term Treasuries (related ETF: iShares Barclays 20+ year Treasury ETFTLT).

In summary, the timing for QE3 is less than ideal, the committed amount is less than during QE1 and QE2, and QE2 has shown that stocks can decline even while the Fed keeps its fingers on the scale. QE3 may not be as great for stocks as many expect and rising oil prices may soon neutralize the “benefits” of QE3.

Detailed timeline:

November 25, 2008: QE1 announced.
Purchase of up to $100 billion in government-sponsored enterprises (GSE), up to $500 billion in mortgage-backed securities (MBS).
January 28, 2009: Ben Bernanke signals willingness to expand quantity of asset purchases.
March 18, 2009: Fed expands MBS asset purchase program to $1.25 trillion, buy up to $300 billion of longer-term Treasuries.
March 31, 2010: QE1 purchases were completed

August 26 – 28, 2010: Ben Bernanke hints at QE2
November 2 – 3, 2010: Ben Bernanke announces $600 billion QE2
June 30, 2011: QE2 ends September 21, 2011: Operation Twist
June 20, 2012: Operation Twist extended