US Treasury bonds and notes have been range bound for over six months.

There is reason to believe that Treasuries, especially 30-year Treasuries bonds, will soon break higher. Why?

Smart Money

Commercial hedgers – a group of traders considered the ‘smart money’ – are buying Treasuries across the bond curve in anticipation of higher prices.

The chart below shows commercial hedgers’ aggregate net exposure to 5, 10, 30-year Treasuries (blue graph).

As the green arrows show, hedgers’ bullish bets are generally vindicated by a period of rising prices.

Below is a list of ETFs likely to benefit from the bullish developments seen by commercial hedgers. Long-term maturities are more dynamic and subject to bigger price moves.

  • iShares Short Treasury Bond ETF (NYSEArca: SHV)
  • iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY)
  • iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI)
  • iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF)
  • iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT)

Seasonality

The green chart insert shows that seasonality is generally bullish for the remainder of the year.

A move above the red resistance lines is necessary to unlock an up side target of 129 – 133. This up side target is based on Fibonacci retracement levels (50% and 61.8%) and an open chart gap.

Sustained trade below 120 would put any rally on hold.

Above analysis was initially published in the August 26 Profit Radar Report. 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.

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, 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 Newsletter to get actionable ETF trade ideas delivered for free.

Are Treasury Bonds Carving out a Major Top?

The multi-decade Treasury bond bull market reached another all-time high in July.

The June 12 Profit Radar Report put 30-year Treasuries bonds on our ‘major market top watch list’ when it published the chart below and stated:

30-year Treasury futures climbed to a new all-time closing high while commercial hedgers (smart money) have racked up record short exposure. Seasonality is about to hit a weak spot. Bearish RSI divergences exist on various time frames. We will be looking for an opportunity to short 30-year Treasuries.”

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

It took a little while for this trade to ‘ripen,’ but the July 27 Profit Radar Report featured this recommendation:

The July 17 PRR stated that: ‘30-year Treasuries may bounce a bit to perhaps give us a second bite at the cherry.’ This bounce materialized this week, and Treasuries reached one of two targets (173’27 and 175’10) that should lead to a down side reversal.

We will leg into this short 30-year Treasury trade with half a position. Investors can short via futures, short TLT or buy the Short 20+ Year Treasury ETF (TBF). We will likely deploy the second half of this trade if Treasuries rally into the second target.”

Treasuries never rallied to the second bounce target, but instead started stair stepping lower.

We closed the short Treasuries position when trade first touched the 200-day SMA on September 13.

Treasuries started to rally shortly thereafter. This rally brings Treasuries to an inflection point.

Inflection Point

From the July high to the September low, Treasuries seem to have traced out 3 waves (according to Elliott Wave Theory – EWT).

Based on EWT, a 3-wave move is a counter trend move, while a 5-wave move usually marks are trend change (or trend continuation in other cases).

This means that the bounce from the September low is either:

  • Wave 4 followed by a wave 5 decline to new lows. This would suggest that the July high is a major top (red number labels).
  • The beginning of another rally leg following a complete 3-wave correction (green arrow).

If the rally from the September low is a wave 4, it should stop near the red resistance line or the black trend channel. Some may argue that the rally has gone too far already to be considered a wave 4 bounce.

While this doesn’t remove all ambiguity, the wave counts give traders some helpful directional clues, such as:

  • Going short is risky while trade remains above the September low
  • Buyers should dial back risk on a drop below the September low
  • A move above 170 and 171 should lead to more gains

The Profit Radar Report monitors dozens of indicators to identify low-risk or high probability setups for various asset classes.

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.

 

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).

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

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

America is no longer known as a manufacturing and export powerhouse. There is one exception, however, America is the leading exporter of wealth. Every year the United States exports hundreds of billions of wealth overseas.

‘Negative compounding’ is how Warren Buffett described the process of paying ever increasing dividends, interest (and rent) to the world outside of the U.S.

Buffett explains his concern with this analogy: The United States has been behaving like a rich family that possesses an immense farm. Not wanting to work, they sell pieces of the farm and increase the mortgage. They improve their cash flow by depleting their assets.

In particular, from the mid-1990s onward Americans consumed far more than they produced, financing the deficit via cheap credit facilitated by the dollar’s world reserve currency status.

By default, this economical and societal shift invites international investors. American sellers are eager to sell and global investors are ready to buy.

Foreigners are able to own a ‘piece of America’ one of two ways:

– Buy U.S. government debt
– Buy U.S. assets

Who Owns U. S. Government Debt?

The chart below provides a quick visual of U.S. debt holders. China and Japan own about $2.5 trillion of U.S. Treasuries, from short-term bonds (NYSEArca: SHY) to long-term Treasury Bonds (NYSEArca: TLT).

Foreign governments and investors own about $5.7 trillion of U.S. debt.

The biggest holder of U.S. debt is actually the Social Security Trust Fund and Federal Disability Insurance Trust Fund (about $2.8 trillion). Other government agencies own another $2 trillion.

The Federal Reserve holds about $1.8 trillion of Treasuries. The remaining $4.7 trillion are owned by mutual funds, pension funds, insurance companies and investors.

The United States Treasury debt amounts to about $17 trillion.

Every country needs investors to finance its operations like a corporation needs shareholders. Beggars can’t be choosers and the U.S. government is happy to take all the money it gets, including the money of international investors.

But owing money to out-of-country investors has its drawbacks as interest payments leave the country. Essentially wealth is being transferred out of the country, or exported. The export of wealth is not beneficial for a country’s balance sheet and health.

Who Owns U. S. Asset

As the chart below shows, foreign ownership of U.S. assets has increased 47.5% to $21.44 trillion since Q1 2009.

The foreign ownership data comes straight from the Federal Reserve’s Z.1 Financial Accounts of the United States report.

Foreign asset ownership (labeled ‘rest of world’ assets in the Z. 1 report) includes financial assets such as deposit accounts, savings accounts, money market accounts and stock holdings such as the SPDR S&P 500 ETF (NYSEArca: SPY), Dow Diamonds (NYSEArca: DIA), Nasdaq (Nasdaq: QQQ) and other funds and individual stocks.

It’s important to note that ‘rest of world’ assets does not include real estate holdings. As international investors continue to buy U.S. real estate, tenants are literally sending their rent checks to landlords overseas.

The export of wealth is significant. Excluding rent payments, the U.S. has transferred somewhere between $550 – 800 billion of interest/income/dividend payments to recipients outside the country.

Based on Buffett’s analogy, American’s are ‘selling the farm’ to finance their spending. The question is how much of the farm is left, or how much is the entire United States worth?

How Much is the United States Worth?

Is it possible to put a price tag on the United States of America? It is, and the article below does just that using asset data from the Federal Reserve. For a detailed analysis on how much the entire United States is worth, click here:

How Much is the Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

The Most Important Number in Finance is Falling … For Now

What’s the most important number in the financial world? You could ask Congress … but of course they couldn’t agree on it. The most important number in finance pulls almost every financial market in its wake. One more hint: The Federal Reserve (thinks it) is in control of it.

What is the most important number in finance?

GDP, unemployment rate, consumer confidence, or CPI?

The most important number in finance is the 10-year US Treasury Yield (Chicago Options: ^TNX).

When this number changes, almost every other number in finance changes.

The 10-year yield nearly doubled since May. The 7-10 Year Treasury Bond ETF (NYSEArca: IEF) dropped as much as 10%, a huge move for Treasury Bonds. The iShares Barclays 20+ Treasury Bond (NYSEArca: TLT) fell as much as 16%.

With rising yields came higher mortgage rates. But it doesn’t stop there. The yield rally also stifled stocks’ performance in two ways:

1) Low interest rates make bonds less attractive to investors and force them to move into stocks (NYSEArca: VTI). Bernanke calls this much-desired side effect the ‘wealth effect’ (although it robs retirees of their income).

2) Rising interest rates cause higher loan rates for businesses. This puts a squeeze on the profit margin and ultimately the stock price.

Yes, the 10-year yield is arguably the most important number in finance and therefore the chief target of Bernanke’s QE programs. The Federal Reserve buys its own Treasury bonds in an attempt to drive interest rates lower.

In the financial heist game it’s called an inside job.

Ironic QE Revenge

Ironically for much of 2013, the 10-year yield has been revolting against its puppet master (the Fed). The almost unprecedented 2013 yield rally is the opposite of the Fed’s objective.

The chart below plots the S&P 500 against the 10-year Treasury Yield.

1) The green box highlights the unwanted, unexpected and unprecedented yield rally.

2) The solid red lines marks yield resistance mentioned by the September 8 Profit Radar Report: “Yields have been rising dramatically, but may be at or near a top (at least a temporary one). As long as yields stay below 3%, odds are starting to favor falling yields and rising Treasury prices.”

Yields tumbled as much as 12% since.

3) The dashed red line shows what the S&P 500 (NYSEArca: SPY) has done since the meteoric yield rally: The S&P 500 is essentially flat and has been range bound since May. Apparently QE money is still finding its way into stocks, but rising yields prevented further gains for stocks.

4) A closer look at the correlation shows that rising yields are not always bad for stocks and shouldn’t be used as a short-term indicator.

Yield Outlook

The long-term trend for the 10-year yields seems to have changed from down to up. Over the short-term, yield may drop a bit further to digest the recent rally.

As the U.S. politicians are ‘impressively’ demonstrating (debt ceiling battle), U.S. Treasuries are not without risk. Even if/once an agreement is hammered out, the long-term futures for Treasuries doesn’t look bright.

As mentioned earlier, the Federal Reserve is deliberately inflating Treasuries. At one point the much-feared taper will begin. Via a brilliant preemptive move – probably in an effort to deflect responsibility – the Federal Reserve has already warned of a market crash (not caused by the taper of course). More details about the Fed’s market crash warning can be found here:

Surprising Fed Study – Is it Warning of a Market Crash?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

Bond Investors Freak – Stock Investors Sleep

Despite last week’s red numbers, stock investors are still quite complacent. The opposite is true for bond investors. The ‘bond VIX’ shows extreme fear and extreme fear is generally seen close to a bottom. Here are the implications for stocks:

The VIX is trading above its upper Bollinger Band and 47% (as of Monday’s close) above its 2013 low. That sounds dramatic, but really, the VIX is just a bit above 16.

Stock investors got a bit of a wake up call (and more of a ‘cold shower’ effect may not be far away), but stock investors are complacent compared to bond investors. How do we know?

Merrill Lynch developed the Merrill Option Volatility Expectations Index (MOVE) to reflect a market estimate of future Treasury bond yield volatility. The MOVE uses the weighted volatility average of the 2, 5, 10 and 30-year Treasuries with a weighting of 20% (2-year), 20% (5-year), 40% (10-year), and 20% (30-year).

In short, the MOVE is like the VIX for Treasury bonds. Bloomberg reported that the MOVE climbed 62% to 80 in May, 5.5 higher than the VIX.

High VIX readings generally foreshadow a bottom or some kind of low for stocks. High MOVE readings do the same for bonds and a low for bonds, or rising bonds, is generally bearish for stocks.

When tested, this rationale holds up as prior instances where the MOVE traded 5.5Xs higher than the VIX have generally led to lower stock prices. Surprisingly, they didn’t always result in higher long-term Treasury prices.

This somewhat funky indicator is only one piece of the puzzle, but along with many others it suggests that stocks may soon hit a wall of June gloom.

Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level

“If it seems too good to be true, it probably is” used to apply to investing. Although this piece of common sense folk wisdom has been eroding due to the Federal Reserve’s money policy, there’s reason to believe that junk bonds are in for at least a wake up call.

The Federal Reserve is watering (or drowning) growth investors and dehydrating income investors. The slim pickings interest rate environment is forcing investors into high yield/high risk vehicles, such as high yield or junk bonds.

High yield bond issuance saw a record high of $346 billion in 2012. In the first quarter of 2013, investors already gobbled up an additional $90.4 billion. Due to unprecedented demand, junk bond yields hit a record low 6.11% in January 2013.

Based on the BofA Merrill Lynch US High Yield Master II Option-adjusted Spread, junk bonds now yield only 4.79% more than US Treasury bonds.

Perhaps with a guilty conscience, the Fed has provided the liquidity needed to neutralize the usually associated with high yield (or more truthfully called junk) bonds.

Nevertheless, as the chart below illustrates, the spread below Treasury bond and junk bond yields is approaching a range that’s been troublesome for stocks.

The chart plots the S&P 500 against the inverted (to better illustrate the correlation) BofA Merrill Lynch US High Yield Master II Option-adjusted Spread.

The red dotted lines highlight the correlation between yield spread lows and market highs. The solid red line stands for yield resistance, the solid green line for yield support.

The current constellation means that risk for stocks is rising. In itself that doesn’t mean that we’ll be confronted with a major market top like 2007, but it increases the odds for a stock market pullback.

Since junk bonds perform similar to stocks, it may be appropriate to scale back or sell junk bond ETFs like the SPDR Barclays High Yield Bond ETF (JNK), or iShares iBoxx High Yield Corporate Bond ETF (HYG). JNK and HYG have both fallen below trend line support, emphasizing the bearish yield spread message.

Treasury ETFs, including the iShares Barclays 20+ year Treasury Bond ETF (TLT) should benefit from a decline in junk bond prices.

In fact, the Profit Radar Report issued a buy signal on long-term Treasuries on March 18, when TLT was still trading at 116.

VIDEO: Will QE3 Drive Treasury Bonds to New All-Time Highs?

Now that QE3 is here we have to talk about the elephant in the room; Treasury bond yields and Treasury bond prices. The purpose of QE3 and Operation Twist is to lower yields. Will it work and is there an investment opportunity?

The Federal Reserve is buying Treasury bonds (more via Operation Twist than QE3). According to the law of supply and demand this should result in higher T-bond prices and lower yields.

This video looks at the historic effect QE and Operation Twist had on 30-year Treasury prices (cause and effect) and identifies the next high probability trade set ups.

ETFs that track long-term Treasuries are the iShares Barclays 20+ year Treasury ETF (TLT) and its double inverse cousin, the UltraShort 20+ year Treasury ProShares (TBT).

Continuous analysis of long-term Treasuries is provided via the Profit Radar Report.

>> Click here to watch video on Treasury bonds.

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