US Treasuries – The Next Bursting Bubble?

Question: I read somewhere that you compared US Treasuries to Tesla. Is that true? – Richard – Chicago, IL

Answer: Yes, I did. To understand why I compared 30-year Treasuries to TSLA, let me share my take on TSLA first.

I published the following analysis about TSLA in the February 8 Profit Radar Report:

It’s rare to see a mania big enough to create the ‘support bowl’ line, but TSLA managed to do it. The last big mania with a similar trajectory was bitcoin in November/December 2017. The last one in the automotive industry was VW in October 2008. Ironically, the rally in VW shares (from below 300 to above 1,000 in less then 2 months) was also driven by short sellers, spooked by Porsche taking control of VW. Within a couple months after its spike above 1,000, VW fell back below 100. 

The chart below allows for a comparison between TSLA and Volkswagen. Inserted in the upper right is a chart of bitcoin along with its corresponding ‘bowl’ support.”

Since then, TSLA fell from 969 to 361.

Knowing what happened to TSLA and what led up to TSLA’s fall explains why I compared 30-year Treasures und the iShares 20+ year Treasury ETF (TLT) to TSLA. The analysis below is from the March 8, Profit Radar Report:

30-year Treasury prices spiked more on Friday than the S&P 500 fell, and TLT was up almost twice as much as 30-year Treasury futures. 30-year Treasury futures are up another 2.5% tonight. Appears like a historic flight to safety, and quite likely sign of panic. It’s hard to apply rational analysis to a market that’s acting irrational. 

The stock market has shown that what goes up, comes back down, and it can do so very quickly. Odds are the same will happen to Treasuries sooner or later. 

In fact, the chart includes curved ‘bowl support,’ the same kind of support/pattern that the  showed for TSLA. Down side risk is very high, and aggressive traders may consider adding to shorts.”

Below is an updated chart for 30-year Treasury futures:

There is a support shelf at 167 – 164, which should cause a bounce, but as long as resistance around 178 holds, the trend is lower.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation 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, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Is the Inverted Yield Curve a Bear Market Signal

Bloomberg just called the inverted yield curve the ‘harbinger of doom.” Is this a fact or fear mongering?

What is an inverted yield curve?

In the investment world, there is generally a strong correlation between maturity and yield. Longer-term maturities pay more interest than shorter-term maturities.

For example, 10-year Treasuries pay more interest than 2-year Treasuries. Since this happens most of the time, this condition is called a normal yield curve (blue graph).

But, we live in interesting times, and the yield curve is about to invert (red graph). This means longer-term maturities actually pay less than shorter-term maturities.

Harbinger of doom?

In fact, the short end of the yield curve – 5-year compared to 3-year (5/3) – has already inverted, which means that 3-year maturities actually pay more interest than 5-year maturities.

This has happened five other times since 1970 (red arrows on chart below mark occurrences since 1976). Only in 1973 did it coincide with a market top. The other four times, it took a minimum of two years before the next big correction.

The chart below plots the S&P 500 against a more popular yield curve, which compares the 10-and 2-year yields. The spread is currently only 0.11%, and it’s threatening to fall below zero for the first time since 2007.

The red bars mark all prior times when the 10/2 yield curve inverted. Although it led to bear markets in 2000 and 2005, it was not a consistent ‘harbinger of doom’ in the 20th century.

It’s also worth mentioned that the S&P 500 was down more than 11% before the yield curve inverted.


The facts show that using an inverted yield curve – 10/2 or 5/3 doesn’t matter – as a bear market signal is at best inaccurate, and at worst misleading.

However, and that’s a big however, that doesn’t mean that stocks won’t slip into a bear market. There are other reasons why stocks were ‘supposed to’ tumble.

My down side targets, published on September 3 (when the S&P traded around 2,900) via the Profit Radar Report, ranged from 2,575 – 2,289. That down side target was provided before the yield curve inverted.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Continued updates are provided via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation 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, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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

Free Access to the Profit Radar Report

For the first time ever, anyone can get FREE ACCESS to the Profit Radar Report. The last 6 complete Profit Radar Report updates covering the S&P 500, Dow Jones, Nasdaq, XLU, US dollar, EUR/USD, gold, silver, and 30-year Treasuries, TLT are available here. Enjoy!

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

April 4, 2018 (6:00pm PST)

Yesterday’s PRR stated that: “We will set our stop-loss at breakeven. If SPY gaps below 258.87 in the morning, we will keep our stop-loss at 256.”

Since SPY gapped lower and opened at 256.75, we set our stop-loss at 256. After another 200-day SMA seesaw, SPY closed at 263.56. We will now raise our stop-loss back to breakeven (258.87).

Monday’s PRR mentioned that the NY Composite a/d line is still above its February and March lows. The chart below provides more details. From March 23 – April 2, the S&P 500 drifted lower, while the NYC a/d line inched higher. This bullish divergence suggests that selling pressure is abating.

This fact, in addition to the S&P 500, DJIA and Nasdaq-100 hitting our down side targets and/or support (March 28 PRR) contributed to the SPY buy signal.

However, bullish outlooks are rare. In fact, some Elliott Wave Theory analysts are vehemently bearish, which is reminiscent of early March, when the March 7 PRR published the chart below and stated:

This is one of those times where it’s dangerous to rely solely on Elliott Wave Theory (EWT). Some EWT analysts currently advocate a 1 – 2 constellation to the up side (green labels), others a 1 – 2 to the down side (red labels). “1 – 2” meaning waves 1 and 2 are complete (or nearly so), with a powerful wave 3 (up or down) to follow, essentially EWT analysts expect either a melt-up or melt-down. We know at least one group will be wrong.

The path that would make most sense (in terms of fulfilling more indicators/patterns than the other paths) is continued range racing, an eventual re-test of the February panic low (blue box), and subsequent rally to 3,000 +/- (blue labels, or scenario #2 shown in the February 28 PRR).”

Our indicators supported the blue path weeks ago, and continue to do so (with or without another drop to 2,530 – 2,460).

However, we wanted to let subscribers know that we always monitor various developments, and if our indictors change (i.e. an increase in selling pressure or emergence of bearish divergences) we will have to adjust accordingly.

Currently we want to have some ‘skin in the game’ if stocks continue higher, but will continue to manage risk.

The DJIA may have finished the 5-waves lower shown in the March 28 PRR. The chart below shows some short-term resistance levels: Red line: 24,300. Trend channel: 24,700.

XLU continues to gnaw on resistance around 51. The pattern of this rally is not exactly bullish, but nevertheless continues to make higher highs and higher lows. RSI-35 is positive, on balance volume not (yet?). The near overbought RSI-2 condition has been digested. We will still close XLU if it moves above 51. XLU could be tracing out a messy triangle with support around 50 or 49 and resistance at 50.80 – 51. Our entry was on February 12 at 48.40.

Summary: Some bullish divergences are building, which is positive. The S&P closed today at minor resistance around 2,644. A move above 2,644, followed by 2,695 – 2,700 would increase the odds that a bottom is in.

The US Dollar Index has not moved for the past 4 days. The March 27 low at 88.942 remains key. As long as trade remains above, the US dollar can continue to move higher. The EUR/USD remains still above 1.2240. A move below 1.2240 may well usher in a protracted decline.

Gold bounced from the 61.8% Fibonacci support level, but that bounce has been feeble. On balance volume remains weak.

Silver is trading uninspired between support and resistance.

April 3, 2018 (10:00pm PST)

Our SPY buy order was triggered today at the open (258.87), which was above 258.10 but below 259. SPY closed 260.77, about 0.7% above our entry. The question is whether we want to limit risk and set the stop-loss at breakeven, or give SPY a longer leash.

The March 24 PRR stated: “The 200-day SMA is too popular for its own good, that’s why we rarely talk about it (aside from February 5, because it coincided with important Fibonacci support at 2,536). On February 9, the S&P 500 briefly tested the 200-day SMA, and bounced 269 points. Now the S&P is back at the 200-day SMA. It would almost be too simple if the S&P again bounces 200+ points after hitting the 200-day SMA (as it did in early February). With or without small bounce, a 200-day SMA seesaw seems more likely.”

The S&P 500 (and SPY) closed below the 200-day SMA yesterday and back above today. This seesaw stopped out a large number of 200-day SMA focused investors. We wanted to see a minimum of one seesaw, but more are possible.

Today’s rally gives us the luxury to ‘play with house money.’ Although risk of another seesaw across the 200-day SMA (which is only 0.10 points below our breakeven point) exists, our first consideration is usually safety. We will set the stop-loss for SPY at breakeven. If SPY gaps below 258.87 (S&P 500 futures are down 7 points in after hours trading), we will set the stop-loss at 256.

Investors more afraid of missing out on potential up side than being concerned with down side risk, may keep SPY without stop-loss.

April 2, 2018 (7:30pm PST)

Tonight’s PRR includes an update to the open SPY recommendation.

For the past 7 weeks we’ve frequently referred to our preferred, or ideal path for the S&P 500 going forward. The February 11 PRR suggested a path similar to 2011, and the February 19 PRR reiterated that: “We would like to see a retest of the panic low (W-shaped recovery) like in October 2011 or September 2015.”

The W-shaped recovery (wave 4 correction according to Elliott Wave Theory) was identical to scenario #2 outlined in the February 28 PRR or the blue path featured in the March 7 PRR.

On March 19, the wave 4 scenario (similar to 2011, or scenario #2 or blue path), which required a test of the initial February panic low at 2,533 became our primary focus (March 19, PRR: “The blue wave 4 projection (March 7 PRR) and scenario #2 (February 28 PRR) is now the preferred path.).”

The chart below compares the 2011 correction (and subsequent rally) with the 2018 correction. Today the S&P dropped below 2,590 – 2,575 (March 28 PRR: “We would still like to see a drop below 2,590 – 2,575.”) and came within 21 points of the February panic low.

The S&P dropped below the 200-day SMA (for the first time since June 27, 2016), but closed 0.88 points above the February 9 closing low. Although RSI-35 is stronger than price, it would take a new S&P closing low to call this a bullish divergence. However, the RSI margin is so slim that an immediate S&P drop lower could erase any bullish divergence.

Below is an updated look at short-term sentiment extremes. All VIX-and option-based sentiment gauges had an uptick in bearishness, but not extreme. The green bars highlight the last two W-shaped corrections. Panic readings only occurred on the initial low (left W wing). The same is true this time.

80% of NYSE stocks closed the day lower, but the NY Composite a/d line is still above its February and March lows.

Our two-prong SPY buy recommendation required: 1) a drop below 256.25 and 2) a subsequent rally above 258.10. The chart below shows the 256.25 and 258.10 level. SPY did not meet both qualifications. The SPY buy order was not triggered. See summary section below for update SPY buy levels.

Unlike the S&P 500, SPY closed below its February low and displays a bullish RSI-35 divergence.

The same is true for the DJIA (new closing low, bullish divergence).

As anticipated, double support around QQQ 154.50 acted as magnet. QQQ fell as low as 153.88, but closed at 155.51. Even though QQQ remained above its February low, RSI-35 and on balance volume are at or below February level. Not bullish.

Summary: The S&P 500 has met the minimum criteria to consider this correction complete. There is, however, a difference between minimum and ideal. The ideal target is 2,530 – 2,460 (see chart below published in the March 24 PRR). S&P 500 futures are up 10 points in after hour trading. At current price, the S&P 500 would open above its 200-day SMA. SPY would gap higher an open above 258.10. It would take at least a 130-point rally to get an initial confirmation that the bottom is in. Since there is a chance the S&P won’t drop into our ideal down side target, investors may need to ‘pick their poison.’

1) Be early and risk further losses

2) Be late and risk missing out on gains.

In short, the minimum target has been met, but we would prefer to see the S&P drop into and reverse in the ideal target zone (2,530 – 2,460).

We will buy SPY at the open or during the day (as long as it is above 258.10 but below 259). Our initial allocation is a conservative 5%. Our stop-loss will be at 256.

April 1, 2018 (5:30pm PST)

For the first time since February 2016, the S&P 500 suffered two consecutive montly red candles. Since the beginning of the 2009 bull market, the S&P recorded more than 2 consecutive red candles on 6 occasions (3 x 2 month, 1 x 3 month, 1 x 5 month, current – purple boxes). After the 3 x 2 red candles (Aug/Sep 2015, Apr/May 2012, May/Jun 2010) the S&P briefly broke below the prior low twice (Jun 2012, Jul 2010) and came within 25 points of the prior low once (Oct 2015). In February 2016 (the 1 x 3 month period), the third red candle exceeded the prior low by only 2 points.

The S&P 500 doesn’t have to rhyme with prior consecutive monthly declines, but if it does, it would be in harmony with our ideal path of one more new low followed by rising prices.

As mentioned on Wednesday, “sentiment is bearish enough to spark a bounce.” The bounce happened on Thursday, and may continue on Monday (first trading day of April has a solid bullish bias, S&P 500 up 17 of last 23 years, average gain: 0.49%).

Minor short-term resistance remains around 2,640-ish and 2,690-ish.

Below is a renewed look at our set of short-term sentiment gauges. The extremes seen around the February panic low have been digested. During double-bottoms (W-shaped corrections), investors are almost always more optimistic during the second ‘W’ low. That’s why a new closing low (if it occurs) will probably not cause the same kind of panic seen in early February, and set up a bullish divergence.

Our New York Composite advance/decline liquidity indicator shows a similar pattern. The NYC a/d line has been trending higher (green line) and down side pressure seen in late March was less intense than in early February (in early February nearly 90% of stocks declined, in late March ‘only’ 80% of stocks declined – vertical red bars & green line).

Short-term, the DJIA closed above the trend channel shown on Wednesday. As the purple lines show, DJIA could carve out a triangle (purple lines, S&P shows similar formation). This kind of micro-analysis during larger waves 4 is less reliable than at other times, but it’s about the only thing somewhat worth mentioning right now.

XLU closed (barely) above red trend line resistance. RSI-35 confirmed this move, on balance volume did not. RSI-2 is near overbought. Next resistance is just above 51. The positives we saw near the February low are starting to fade a bit, and XLU will have to overcome 51 to unlock further upside. If XLU rallies to 51 on Monday/Tuesday, RSI-2 will likely be fully overbought. We will lock in gains and sell XLU if it spikes above 51.

Summary: Short-term sentiment and money flow (liquidity) suggest that fear and selling pressure are improving, setting the stage for bullish divergences. For a true bullish divergence, we would have to see a new S&P 500 closing low, which is what we’re waiting for to confirm our ideal path for a more significant bottom.

Although we are looking to buy, our indicators and cycles do not project massive up side, even once a low is in place.

The EUR/USD, US Dollar Index, gold and silver did not move much since Wednesday’s PRR.

March 28, 2018 (6:10pm PST)

The market will be closed on Friday in observance of Good Friday. The next update will be published as usual on Sunday.

The week started with a massive rally (Monday) and was followed by an even bigger drop (Tuesday). Normally pops and drops like Monday/Tuesday would validate a special PRR, but considering the larger context (March 19 PRR: “Waves 4 cause a lot of whipsaw and require patience. There may well be times where it will feel like we missed an opportunity … just before stocks reverse and offer a second [or even third] chance.”) it’s sometimes best not to over-analyze certain moves.

The S&P 500 is stomping around atop the blue support cluster at 2,590 – 2,570. We would still like to see a drop below 2,590 – 2,575 (ideally to around 2,530 or 2,460), but short-term sentiment is bearish enough to spark a bounce.

Pinpointing resistance levels in a wave 4 environment tends to be a fools errand, but 2,645-ish and 2,690-ish may be worth watching. A move above 2,645-ish could lead to 2,690-ish, but such a bounce would not eliminate the potential for a drop below 2,590.

The hourly DJIA chart below outlines a short-term trend channel and potential short-term Elliott Wave Theory count. If that’s correct, DJIA should drop below 23,360, find support (ideally at 23,000 – 22,800) and rally.

Double Nasdaq-100 QQQ support around 154.50 could act as magnet and reversal target. At this point, there is no bullish divergence as RSI-35 is toying with new lows (even though QQQ remains above its February low) and on balance volume is already at new lows.

Summary: This is a difficult environment to trade, which is why we trade only if the S&P follows our ideal path (drop below 2,590 at minimum, followed by a rally). The current constellation of various indicators suggests that carving out a low may be a process that could take a few more days, even weeks. For now we will keep our SPY buy recommendation open.

We will take another close look at investor sentiment and money flow in Sunday’s PRR.

As anticipated, the US Dollar Index tested trend channel support at 88.90 (blue oval). From there it rallied strongly. Yesterday’s low (blue oval) could be important and can be used as a stop-loss level for long positions (like UUP). We may soon be adding to our existing UUP position.

Short-term, the EUR/USD allows for a triangle (purple lines), with a potential bullish breakout. This doesn’t have to happen, but it could. If it does, it would likely lead to a test of the long-term trend channel at 1.2620 (black line) and a great opportunity to short the euro (long dollar). A break below 1.2240 would very likely mean that a EUR/USD top (and dollar bottom) is in and signal a longer-term trend reversal.

Long-term, the EUR/USD shows a bearish RSI divergence, is close to long-term trend channel resistance, with cycles soon turning lower, and sentiment supporting falling euro prices.

Gold validated our suspicion and fell hard, retracing almost exactly 61.8% of the March 20 – 27 rally. If gold started a rally with a target north of 1,382 (wave 3 up next?), it should stay above Fibonacci support at 1,328 or 1,318. For aggressive traders, this is a low-risk opportunity to go long with a stop-loss just below support.

Of course, a strong gold rally is unlikely if the US Dollar Index is also about to rally.

Silver is once again back at support around 16.2.

This is a follow up to the 30-year Treasuries analysis published on March 14 PRR.

TLT closed above the bold (previously red, now) green trend line. According to Elliott Wave Theory, TLT can still relapse to a new low. However, a move above 122.42 as good as eliminates this bearish option. Cycles are pointing higher. In short, the trend is higher as long as TLT stays above ascending trend line support (120.40) and once TLT clears 122.42.

Below is an updated look at the 30-year Treasury Yield trend channel shown on March 14. Since then there’ve been two more trend channel touch points. A sustain yield break below 3% (based on trend channel) and 2.98% (based on Elliott Wave Theory) will point to lower yields/higher prices.

Continued updates and analysis is available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile 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, 17.59% in 2014, and 24.52% in 2015.

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

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What’s Next? Bull or Bear Market? Try Gorilla Market

Right or wrong? The QE bull market will last as long as the Federal Reserve keeps QE going. A majority of investors say ‘Yes,’ but a curiously sophisticated experiment and powerful data suggest a surprise outcome.

In 2004 Daniel Simons of the University of Illinois and Christopher Chabris of Harvard University conducted a fascinating experiment.

If you want to be part of the experience take a minute (it literally only takes a minute) and watch this video before you continue reading.

To get the full effect, watch the video first and don’t read ahead.

If you don’t want to watch the video, here’s a quick summary:

Truth in Simplicity

The experiment is quite simple. There are two groups of three people each. One group is wearing black shirts, the other group white shirts.

The three people wearing black shirts are passing one ball to fellow black shirts; the ones wearing white shirts are doing the same. So there are six people, passing two balls.

The assignment is to watch how many times the players wearing white, pass the basketball.

It’s a simple assignment that requires some concentration and a clear mind.

The answer: The white shirts pass the ball 15 times.

But wait, there’s more. Many viewers get the number of passes right, but completely overlook a woman dressed in a gorilla suit. The gorilla walks slowly across the scene, stops to face the camera, and thumps her chest.

Half of the people watching the video did not see the gorilla. After watching the video for a second time, some of them refused to accept that they were looking at the same tape and thought it was a different version of the video.

“That’s nice, but what’s your point Simon?” Good question.

The Invisible 800-Pound Gorilla

The experiment was supposed to illustrate the phenomenon of unintentional blindness, also known as perceptual blindness. This condition prevents people from perceiving things that are in plain sight (such as the bear markets of 2000 and 2008).

Much of the media has zeroed in on one singular cause for higher or lower prices. Sample headlines below:

Reuters: Wall Street climbs as GDP data eases fear of Fed pullback
Reuters: Brightening jobs picture may draw Fed closer to tapering
Reuters: Wall Street slips amid Fed caution

The media is busy ‘counting passes,’ or watching Bernanke’s every word and interpret even the slightest variation of terminology.

The Fed’s action is the only thing that matters, but amidst ‘counting passes,’ many overlook the gorilla.

Gorilla Sightings

It’s believed that a rising QE liquidity tide lifts all boats. This was impressively demonstrated in 2010 and 2011 when various asset classes and commodities reached all-time highs. It only conditionally applies to 2012 and 2013 though.

In 2011 gold and silver rallied to nominal all-time highs. Why?

  1. The Fed pumped money into the system (aka banks) and all that excess liquidity had to be invested somewhere, anywhere, including precious metals.
  2. Fear of inflation. Gold is known is the only real currency and inflation hedge. Silver rode gold’s coattail and became known as the poor-man’s gold. From 2008 – 2011 gold prices nearly tripled and silver went from $8.50 to $50/ounce.

Since its 2011 high, the SPDR Gold Shares ETF (NYSEArca: GLD) has fallen as much as 38.29% and the iShares Silver Trust (NYSEArca: SLV) was down as much as 63.41%.

This doesn’t make (conventional) sense or does it. QE or the fear of inflation didn’t stop in 2011. In fact, QE (and the associated risk of inflation) is stronger than ever. Based on the above rationale, the gold and silvers meltdown is inconceivable and unexplainable.

The QE ‘Crown Jewel’

Initially QE was limited to government bonds or Treasury bonds. In other words, the Federal Reserve would buy Treasuries of various durations from banks and primary dealers with freshly printed money.

The effect was intentionally twofold:

  1. The Fed would pay top dollars to keep Treasury prices artificially inflated and interest rates low.
  2. The banks would have extra money to ‘play’ with and drive up asset prices, a process Mr. Bernanke dubbed the ‘wealth effect.’

With that thought in mind, take a look at the iShares 20+ year Treasury ETF (NYSEArca: TLT) chart above.

From the May peak to June trough TLT tumbled 14.56%, more than twice as much as the S&P 500 (7.52%).


The lessons are simple:

  1. QE doesn’t always work and can misfire badly.
  2. We don’t see every gorilla (or looming bear).

All this doesn’t mean that the market will crash tomorrow. In fact, the stock market doesn’t exhibit the tell tale signs of a major top right now and higher highs seem likely.

Unintentional blindness is real and often magnified by the herding effect. The investing crowd (or herd) is convinced that stocks will go up as long as the Fed feeds Wall Street.

The above charts suggests that we shouldn’t follow this assumption blindly.

Glaring but Misunderstood QE – How Much the Fed is Really Spending

QE1, QE2, QE3, expiring Operation Twist, and now QE4. Which of those programs are “sterilized” (non-inflationary) and which ones devalue the dollar? If you’ve lost track, here’s a quick visual summary.

Will Operation Twist be replaced by outright QE was a question addressed here early in December. As it turns out, the Fed decided to do just that.

We now have multiple layers of QE working simultaneously. What’s the total amount being spent and will inflation finally take off?

QE Tally

There are three official tranches of quantitative easing (QE):

1) QE3, announced on September 13, 2012. The Federal Reserve will buy $40 billion per month worth of mortgage-backed securities.

2) QE4, announced on December 12, 2012. The Federal Reserve will buy $45 billion per month worth of longer term Treasuries (corresponding ETF: iShares Barclays 20+ Treasury ETFTLT).

QE4 will be replacing Operation Twist in 2013. Operation Twist is considered “sterilized” or cash neutral QE. Operation Twist simply reshuffled the balanced sheet (sell shorter term in favor of longer term maturities). It did not expand the balance sheet.

Unlike Operation Twist, QE4 will be financed by “non-sterilized” or freshly printed money. This process increases the Federal Reserve’s balance sheet and the amount of money in circulation.

3) Reinvestment of maturing securities. In a December 12 press release, the Federal Reserve stated: “The Committee is maintaining its existing policy of reinvesting principal payments from its holdings mortgage-backed securities and, in January, will resume rolling over maturing Treasury at auction.” This amounts to roughly $25 billion/month of sterilized QE.

In total, the Federal Reserve will buy $110 billion worth of Treasuries and mortgage-backed securities every month until the unemployment rate drops below 6.5% and inflation remains below 2.5%.

The first chart below illustrates QE3, QE4, and reinvestments separately and how the three layers combined compare with QE1 and QE2.

The second chart provides a more detailed glimpse of the Fed’s balance sheet (and a mere glimpse is all mere mortals are allowed).

The Fed’s balance sheet as of November 21, 2012 stood at $2.84 trillion and is expected to balloon another $1 trillion over the next 12 months.

Currently $966 billion or 34% are invested in agency debt, mainly mortgage-backed securities. In other words, one of every three dollars in circulation is backed by toxic assets, the same stuff that caused the “Great Recession.”


Inflation, where art thou? The Fed’s balance sheet exploded from below $1 trillion to nearly $3 trillion, but inflation (let alone hyper inflation) has been a no show.

Will the current round of QE deliver on inflationist’s predictions? I doubt it.

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.

Operation Twist about to Expire – Will it be Replaced by Outright QE?

The Federal Reserve’s $45 billion a month Operation Twist program is scheduled to expire at the end of this month. Based on the sound bites of several Reserve presidents, there will be a replacement. Will it be more outright QE?

Operation Twist is circling the drain, set to expire on December 31, 2012.

Will Operation Twist be extended or even be replaced by outright QE?

What’s the difference between Operation Twist and Quantitative Easing (QE)?

Operation Twist Basics

Since September 2011, the Federal Reserve has been buying about $45 billion of longer-term Treasuries per month with the proceeds from sales of a like amount of shorter-term debt.

Unlike outright QE purchases, the Operation Twist asset reshuffle does not add to the Fed’s balance sheet.

Will Operation Twist be Replaced by Outright QE?

Boston Federal Reserve Bank president Eric Rosengren, one of the most vocal proponents of Fed asset purchases, advocates to continue spending $45 billion a month buying long-term Treasuries.

St. Lois Federal Reserve Bank president James Bullard has a different opinion. He said that the expiring Operation Twist program should not be replaced on a dollar-for-dollar bases, because asset purchases that expand the balance sheet (like QE) have a bigger effect than Twist.

QE Tally

So far the Federal Reserve has purchased about $2.4 trillion worth of government bonds and mortgage-backed securities.

During QE1, the Fed spent about $78 billion a month.

During QE2, the Fed spent about $75 billion a month.

During QE3, the Fed is spending about $40 billion a month.

Concurrent to QE2 and QE3 the Fed is reinvesting the proceeds of maturing securities. Based on a balance sheet of $2.4 trillion, this is a significant amount.
Abount $25 billion a month.

For the month of December, the Fed will spend about $65 billion buying Treasuries and mortgage-backed securities. This is “new” money.

An additional $45 billion of the proceeds from selling short-term Treasuries is re-invested in long-term Treasuries.

QE’s Effect on Treasury Prices

What does all of this artificial demand for long-term Treasuries mean for Treasury prices and corresponding ETFs like the iShares Barclays 20+ year Treasury Bond ETF (TLT)? It appears that the effect of QE3 on Treasury prices has been muted. It certainly hasn’t driven prices up as should be expected.

In fact, 30-year Treasury prices have been stuck in a trading range capped by two long-term resistance lines and buoyed by an 18-month support line. As long as prices remain in that range the stalemate is likely to continue.

With strong seasonality for stocks straight ahead (and an inverse correlation between stocks and long-term Treasuries), I assume that price will break down.

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.

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

QE3, Apple, and Rekindled Love for Stocks – How to Use Technicals to Navigate a Confusing Stock Market

This week is jam-packed with news. Apple, Bernanke, and Germany’s Constitutional Court are slated to make potentially market-moving announcements. Here’s one simple technical tip that will help navigate a confusing situation.

What does Apple’s Tim Cook, the Fed chairman Ben Bernanke, and Germany’s Constitutional Court have in common? They are all expected to announce much anticipated news this week.

Wednesday, September 12. Apple

Apple is putting the finishing touches on the Yerba Buena Center for the Arts in San Francisco. That’s where a select few will (or are expected to) lay eyes on the new iPhone 5.

Apple shares (AAPL) didn’t quite reflect fans’ excitement as shares dropped 2.6% on Monday.

This drop triggered a bullish percentR low-risk entry against the 20-day SMA. Just because this is called a “bullish” low-risk entry doesn’t mean it’s time to buy.

Apple shares tend to move higher when new products are revealed and correct thereafter (with the exception of the April 2012 iPad 2 unveiling, which coincided with a larger drop, instead of a rally).

A rally parallel to Apple’s event would likely provide a good set up to sell AAPL shares. A drop below the percentR trigger level will also suffice if we don’t see the customary Apple release spike.

Short selling a stock is not for everyone. But Apple accounts for 20% of the Nasdaq-100 index (corresponding ETF: PowerShares QQQ) and shorting the Nasdaq-100 via short ETFs like the Short QQQ ProShares (PSQ) is a more accessible way to benefit from falling Apple prices.

Wednesday, September 12. German Constitutional Court Ruling

The European Stability Mechanism (ESM) is the facility anointed to distribute European “bailout cash” to struggling euro zone members.

The ESM has many flaws (one of them is lack of funding) and one of them may prevent its VIP from playing “money ball.” The German Constitutional Court will rule over the legality of participating in the ESM on Wednesday.

Thursday, September 13. FOMC and QE3?

The Federal Open Market Committee (FOMC) will meet Wednesday/Thursday this week.

The S&P 500 Index (SPY) is points away from a 55-month high and I don’t think that launching QE3 right now makes sense, but I don’t know what’s going on behind closed FOMC doors and the general consensus is that the Federal Reserve will announce QE3 on Thursday.

Similar announcements have resulted in large moves for stocks, Treasuries, currencies, gold and silver.

Combat Uncertainty with Technicals

What does the S&P 500 chart tell us about stocks? If the chart could talk it’d say that now is “rubber meet the road” time.

The S&P is close to key resistance at 1,440 (this month’s r1 is at 1,437) which the Profit Radar Report has been harping about. 1,440 is the most important resistance in the neighborhood. It separates bullish bets from bearish ones and provides directionally neutral low-risk trade opportunities (my bias is to the down side, which may require waiting for a spike above 1,440 followed by a move below).

Various news events suggest that this week is important. Technicals agree. Use important support/resistance levels to put the odds in your favor.

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.