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.

Leading Indicator: What the Yen Carry Trade Predicts for the S&P 500

Investors are always looking for leading indicators. Here’s one: The yen carry trade. This trade has been a recipe for success … until this week. Here’s what went wrong and what it says about stocks’ future.

Here’s a look at Wall Street’s moneymaking recipe box. Always delicious (except for this week), the yen carry trade feast.

The traditional yen carry trade is an interest rate play, where investors borrow yen and buy higher interest vehicles (which used to be U.S. Treasuries).

But, interest rates around the globe are close to zero, so there’s no margin.

The traditional yen carry has lost its spice. Here’s the new and improved recipe:

  1. Borrow yen
  2. Buy U.S. stocks
  3. Enjoy tasty profits (falling yen, rising stocks)
  4. Rinse and repeat …

The chart below shows the close correlation between the S&P 500 and the USD/JPY, which measures the value of the U.S. dollar in yen.

A falling yen and rising U.S. stocks turn both components of the carry trade (basically short the yen and long U.S. stocks) profitable.

But there are always two sides to a trade, and a rising yen (= falling USD/JPY pair) translates into double whammy losses.

That’s exactly what happened this week.

In other words, just as using sugar instead of salt screws botches a recipe, a rising yen (instead of a falling yen) turns Wall Street’s tasty profit formula into a bitter pill to swallow.

Due to the close S&P 500 / USD/JPY correlation, USD/JPY can be used as a leading indicator for the S&P 500 (NYSEArca: SPY).

What’s USD/JPY telling us about the S&P?

The Profit Radar Report featured the chart below in the March 12 update and made the following comment:

A rising yen (falling USD/JPY) would stifle this particular carry trade. The chart below shows that USD/JPY hasn’t been able to move above resistance at 103.70. The USD/JPY staying below 103.70 is one of the few clues that suggests stocks may actually move lower.”

Resistance at 103.70 is important, because it’s made up of three separate resistance levels meeting at the same spot:

  1. The ascending red trend line
  2. The May 2013 high
  3. 61.8% Fibonacci retracement of the points lost from January 2 to February 3

As it turns out, this resistance cluster was too much, the USD/JPY pair succumbed to the pressure, dragging the S&P 500 down as well.

By Friday the USD/JPY pair closed even below a minor support shelf, suggesting more down side to come.

Where is next support and could the unraveling of the carry trade turn into a bigger correction for U.S. stocks?

A detailed forecast for the S&P 500 is available via the Profit Radar Report.

The USD/JPY pair wasn’t the only factor that warned of impending down side.

Perhaps the most popular technical indicator known to Wall Street suggested the same thing, but surprisingly nobody picked up on it. More details here:

The Biggest S&P 500 Dilemma Explained in One Chart

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.

5 Reasons Why 2014 Will Be a Tough Year and the One Reason it Won’t

At the beginning of the year we saw many red flags that warned of a tough 2014 trading year. However, those warning signals were easily blown away by the strong February recovery. Here’s another look.

The swift February recovery made Wall Street forget about the many warning signals stocks morse-coded to investors in January.

Selective short-term memory loss can be dangerous, so here’s a quick summary of why 2014 should be a tough year:

5 Reasons to Be Bearish

1. Two monster stock market cycles project a major S&P 500 (SNP: ^GSPC) top in 2014. Not just one, but two multi-decade cycles join for a potent sell signal (details available in the Profit Radar Report’s 2014 Forecast)

2. On January 31, the Dow Jones violated its December closing low. Since 1950, there have been 31 prior first quarter December low violations. All but two (1996, 2006) led to further losses, averaging 10.9%.

3. The S&P 500 lost 3.6% in January, the Dow Jones 5.3%. Based on the January Barometer (as January goes, so goes the year), there’s a 73.3% probability 2014 will be a tough year.

4. Mom & Pop investors have returned to Wall Street. The chart below (originally published on January 8) shows retail investors’ rediscovered romance with stocks.

5. Money velocity is at its worst level since 1959. Money velocity is the frequency at which one dollar changes hands and is used to buy goods and services within a given period of time.

The chart below (originally published on January 22) plots the S&P 500 (NYSEArca: SPY) against M2 money velocity.

The Best Reason to Be Bullish

The February 23 Profit Radar Report (PRR) published the chart below. The yellow projection was first published on February 3 and forecasted a strong rally to S&P 1,830.

Although aggressive at the time, the S&P 1,830 target turned out to be to conservative and required an adjustment.

The green line reflects the adjusted projection introduced via the February 23 PRR.

As per the green projection, the S&P 500 was to rally to the up side target of 1,870 followed by a reversal lower.

The reversal lower however, could only be a brief correction (wave 2) within a larger 5-wave move to new all-time highs.

This outlook is based on Elliott Wave Theory (EWT). A detailed projection of this scanario (and explanation of EWT) is discussed in yesterday’s Profit Radar Report update.

A sneakpeek at the S&P 500 2014 projection (based on all the factors discussed above and many more) is available here:

An Updated Look at The Full 2014 S&P 500 Forecast

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.

Can Yellen Shatter This Bearish S&P 500 Pattern?

Janet Yellen’s first public remarks since succeeding Ben Bernanke will be carefully scrutinized. This opens another round of technical analysis vs Fed talk. Will Yellen’s remarks be strong enough to negate or even shatter this bearish S&P 500 pattern?

Here’s a look at the most basic component of technical analysis: Trading volume.

In mid-January the S&P 500 hit a rough patch that actually caused some seriously red candles.

Two down days in particular (January 24 and February 3 – see black arrows) rattled the market as sellers flooded Wall Street and trading volume picked up.

In fact, January 24 trading volume was the highest since July 31 (with the exception of September and December triple witching).

To provide a visual, I’ve plotted the S&P 500 against NYSE trading volume (chart 1) and the SPDR S&P 500 ETF (NYSEArca: SPY) along with SPY shares traded (chart 2).

Both charts show the same pattern. High volume on down days, and low volume on up days.

Under normal circumstances this would suggest that investors are more eager to sell than to buy. However, a QE market doesn’t qualify for ‘normal circumstances status.’

We’ve seen this pattern fail many times since 2009. Will this time be different? Will Yellen’s reassuring remarks to Congress negate the bearish volume pattern?

A number of indicators suggest that stocks will make another trip to lower lows.

The second SPY chart shows the 20-day and 50-day SMA not far above current prices. Equivalent resistance for the S&P 500 is at 1,802 – 1,810, with 1810 being more important resistance.

Sustained trade above 1,810 would unlock the next up side target.

A more detailed S&P 500 forecast and the next key resistance is available here:

S&P 500 Forecast: Short-Term Gain vs Long-Term Pain

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.

13-Year Cycle Projects S&P 500 Market Top

A picture speaks more than a thousand words and this S&P 500 chart shows just how powerful the 13-year (and 7-year) S&P 500 cycles have been. Danger lies ahead if those cycles end up being more powerful than QE.

Most markets are subject to boom and bust cycles.

A look at a long-term chart makes it quite obvious that the S&P 500  has strictly adhered to a 13 and 7-year cycle.

We don’t know exactly what’s causing such cycles, but if the S&P 500 SPY finds such cycles important, we shouldn’t ignore them.

13-year S&P 500 Cycle

The chart below shows the S&P 500 (monthly bars) since 1973 on a log scale.

It’s easy to spot at least three major tops and bottoms (dashed gray brackets: December 1974, August/October 1987, March 2000) spaced in 13-year increments.

Based on this 13-year ebb and flow sequence, the next top is projected to be somewhere around the year 2013.

7-year S&P 500 Cycle

What about the Great Recession? The 13-year cycle didn’t see the financial deleveraging debacle, which saw the financial sector (NYSEArca: XLF) decline 80%+, coming.

The post 2007 financial deleveraging debacle falls within the 7-year cycle, which has graced Wall Street with its presence every 5 – 7 years – 1974, 1982, 1987, 1994, 2000, 2007.

In fact, in a December 24, 2007 interview with CNBC’s Maria Bartiromo, I recommended to employ strategies that benefit from a topping market. The 7-year cycle contributed to my back-then bearish outlook.

The 7-year cycle suggests that 2013 and/or 2014 will not enter the history books as just an average garden-variety year on Wall Street.

Cycle Reliability

How trustworthy are those cycles? You are looking at the evidence. It’s all here. Whether you consider the cycles credible or file them away as bogus is up to you.

Cycle analysis is easy. In a nutshell, cycles work … until they don’t.

Regardless of its track record, no investor should base investment decisions solely on cycles (or any other single indicator).

What Cycles Can and Cannot Do

An air traffic controller that spots an unidentified object on his radar will certainly keep a close eye on it until he knows what he’s dealing with.

We don’t have to ‘ground every flight’ or sell all stocks, but the 13 and 7 years cycle should be monitored closely on our radar. A cycle high for the S&P 500 (NYSEArca: IVV) will have a similar effect on the Dow Jones (DJI: ^DJI) and every other major index and shouldn’t be underestimated.

As subscribers to my Profit Radar Report know, I always look at dozens of indicators. To confirm or invalidate the cycles I will be looking at breath indicators and key support levels.

New highs with bearish breadth divergences or a drop below key support would suggest that the cycles need to be taken seriously. As always, my real time observations will be available via the Profit Radar Report.

In the meantime, it helps to know and understand which two secret forces (secret because most of Wall Street isn’t aware of them) continue to propel stocks higher.

If or once those forces dissipate, the bearish cycles are likely to take over. The two forces are discussed in detail here:

QE Haters are Driving Stocks Higher
The Secret QE Bull Market Trade Pattern that Almost Never Fails

Simon Maierhofer is the publisher of the Profit Radar Report.

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

QE Haters are Driving Stocks Higher

Stubborn bearish sentiment is one of the key reasons why stocks continue to rally, essentially giving bears the finger. Bears can’t stop the QE liquidity waves. Perhaps it’s time to stop fighting them and learn how to surf them. It would be the best for bears … in two ways.

Bears, if you are looking for someone to blame for having been on the wrong side of the trade – look in the mirror.

Yes, the Federal Reserve’s financial alchemists have artificially engineered this QE bull market and yes, the economy is still lagging.

But that’s not the only reason. The stock market is actually using the bears as a springboard for higher prices.

Stock markets don’t roll over until most of the bears throw in the towel, but bears maintain a tight grip on their bearishness even at their own detriment.

This front-page article featured in the May 5, 2012 edition of USA Today sums the situation up nicely:

“Wall Street’s long-running story about how stocks are the best way to build wealth seems tired, dated and less believable to many individual investors. Playing the market isn’t as sexy as it used to be. Stocks remain out of fashion.”

I remember this time well, because my three key indicators (I call them the three pillars of market forecasting: technical analysis, seasonality and sentiment) were about to line up for a major buy signal.

In a June 3, 2012 update to subscribers I wrote that: “The S&P 500 is within our 1,248 – 1,284 target range for a bottom. Most of my studies suggest higher prices over the coming weeks and a tradable bottom due soon. While June generally falls in the seasonally weak summer period, we find that election year Junes generally sport a strong performance”

The S&P 500 bottomed at 1,266 on June 4, 2012.

Sentiment Sours as Stocks Rally

Since then stocks have rallied and sentiment has soured.

The chart below shows just how stubborn bears are. The S&P 500 ETF (NYSEArca: SPY) soared as much as 36% since its 2012 low, yet the 6-week SMA of bullish investment advisors and newsletter-writing colleagues (polled by Investors Intelligence) is closer to readings seen near bottoms than tops (red circles).

This trend was obvious in early 2013 when the financial media was outright bearish even though the Dow Jones  just pushed to new all-time highs and the VIX (Chicago Options: ^VIX) was lingering near multi-year lows.

Via the March 10, 2013 Profit Radar Report I shared this observation with my subscribers:

“The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Sentiment allows for further gains.”

Small Correction, Big Effect

The minor summer correction (big black arrow) has suffocated rising optimism before it had a chance to flourish into extremes.

Now, nearly all major US indexes are near all-time highs – the Nasdaq (Nasdaq: QQQ) is outperforming every other broad market index – but sentiment is at best neutral.

From a sentiment analysis point of view, this suggests yet higher stock prices eventually (this doesn’t preclude a deeper correction).

Aside from sentiment, there is an unnoticed but very effective technical pattern that telegraphed the onset of almost every market rally since the 2009 low.

More details about this pattern can be found here:

The Secret QE Bull Market Trade Pattern that Almost Never Fails

Simon Maierhofer is the publisher of the Profit Radar Report.

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

 

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%).

Lessons

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.

Is it Time to Bury Your Head in the Sand and Hope for the Worst?

Welcome to the new and not just imaginary QE world where weak GDP (only the most followed gauge of economic activity in the U.S.) numbers are applauded and received with cheer by Wall Street. Confused? Oh you shouldn’t be anymore.

Ignorance is bliss. We are all familiar with the bad news is good news phenomenon created by the Fed’s QE.

Bad news is good news because it means either more QE or the same QE over a longer period of time. Many commentaries have been written about today’s backwards state of affairs.

Below is one of the most blatant displays of the new up side down investment paradigm.

For your enjoyment, here is a section from a June 26, 2013 Reuters article under the headline: Wall Street Climbs as GDP Data Eases Fear of Fed Pullback.

“The broad-based advance lifted the S&P 500 above the 1,600 threshold for the first time since last Thursday. Stocks have recently sold off after the Fed said it is moving closer to reducing its monthly bond-buying efforts, but the last two days of buying show some believe the market has overreacted.

The rally followed data showing the U.S. economy grew at an annual rate of 1.8 percent in the first quarter, well below expectations for gross domestic product to grow at a 2.4 percent annual rate.

While the GDP data looks backward and includes the start of cutbacks in federal spending, analysts said it could influence the Fed’s considerations of whether the economy is strong enough for it to begin scaling back its $85 billion a month in bond purchases. Should this contribute to keeping the Fed from moving sooner, it would be seen as supportive for stocks.

Stocks have been closely tied to the central bank’s easy money policy, with the Dow and the S&P 500 hitting a series of record closing highs as investors bet that the bond buying would remain in place, and then dropping dramatically on hints that the stimulus could be reduced before the end of the year.

In a nutshell, GDP – the most watched gauge of the economy’s health – came in 25% lower than expected, but Wall Street applauded because this means more QE.

What about the second-most watched gauge of the economy’s health – unemployment figures?

As per last Friday’s BLS (Bureau of Labor Statistics) release, the U.S. economy added 195,000 jobs in June. The unemployment rate stayed at 7.6%.

Stocks rallied. Why?

Associated Press: Stronger Than Expected Job Growth Raises Hopes for Stronger Economy.

But shouldn’t that be bad news for the stock market?

Reuters: Brightening Jobs Picture May Draw Fed Closer to Tapering

Is anyone confused? If so, just hope for bad economic news to drive up stock prices. If that doesn’t work, keep in mind that good news is good news and bad news is good news (really, any news is good news).

I personally feel that economic news and the medias spin on the news deserves only a very limited portion of my attention span.

I rely on technical analysis. Technical analysis is not flawless, but it is consistent.

Technical indicators told us a week ago that the S&P 500 and Nasdaq-100 will come up and close open chart gaps at 1,629 and 2,960. The gaps have been closed and the market is at a key inflections point. How stocks react here should set the stages for the coming weeks.

The Shameless, Obvious & Unreported Cheating Tricks of Politicians and Wall Street

When was the last time both houses of Congress unanimously passed a bill? It was actually very recent, when Congress repealed and castrated the Stocks Act, a law designed to curtail insider trading by politicians.

Amidst much fanfare, on April 4, 2012, President Obama signed into effect the STOCK Act. What is the Stock Act? The acronym ‘STOCK’ Act stands for:

Stop Trading On Congressional Knowledge

That law was designed to provide transparency about the finances of members of Congress and senior officials, and to make sure they are not benefiting financially from their knowledge as government operatives.

Why was the STOCK Act needed?

Insider trader is illegal for everyone but Congressmen, senior officials and their staff. Yes, they took advantage of that convenient little loophole. For example:

1) If you sit on a healthcare committee and you know that Medicare is considering not reimbursing for a certain drug, that’s market moving information. And if you can trade stock off of that information and do so legally, that’s a great profit making opportunity.

During the healthcare debate of 2009 members of Congress were trading health care stocks, including House Minority Leader John Boehner who led the opposition against the so-called public option, government funded insurance that would compete with private companies. Just days before the provision was finally killed, Boehner bought health insurance stocks, all of which went up.

2) In mid September 2008, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Literally, the next day Congressman Bachus bought puts (options that increase in value when stocks fall) based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. While Congressman Bachus was publicly trying to keep the economy from collapsing, he was privately betting that it would.

3) When Illinois Congressman Dennis Hastert became speaker of the House in 1999, he was worth a few hundred thousand dollars. He left the job eight years later a multi-millionaire. Congressmen make about $174,000/year. How did he do it?

In 2005, Speaker Hastert got a $207 million federal earmark to build the Prairie Parkway through the cornfields near his home. Just before, Hastert had bought some of those cornfields and land adjacent to where the highway is supposed to go. Five months after this earmark went through he sold that land and made about $2 million.

4) The same good fortune befell former New Hampshire Senator Judd Gregg, who helped steer nearly $70 million dollars in government funds towards redeveloping a defunct Air Force base, which he and his brother both had a commercial interest in.

No, I Want to Continue My Insider Trading

Apparently – if you believe politicians – the planned online database that would keep track of Congressmen’s financial transactions was viewed as a national security risk by Congress.

Without much fanfare, both houses and Congress unanimously – when was the last time there was a unanimous vote in Washington – repealed and castrated the STOCK act. President Obama signed the repeal a day later.

The signing of the STOCK Act in December 2012 was showcased on TV. That faithful day President Obama vowed: “I’m very proud to sign this bill into law. I should say that our work isn’t done. There is obviously more we can do to close the deficit of trust and limit the corrosive influence of money in politics.”

That’s right Mr. President, your work was not done. The Act had to be castrated to make it palatable. The benchmark of merely “limiting the corrosive influence of money in politics” (forget about eliminate, limit is the best we can do) was obviously set too high.

Like a dog off the leash, some politicians get to revel in their newfound freedom. Since the STOCK Act was repealed, we read this (reported by the Washington Times):

Sen. Dianne Feinstein introduced legislation to route $25 billion in taxpayer money to a government agency that had just awarded her husband’s real estate firm a lucrative contract to sell foreclosed properties at compensation rates higher than the industry norms.

As it turns out, this will be the first in a series of articles about corrupt politicians and Wall Street gangsters. The next article will reveal how big banks rig multi-trillion markets.

>> Sign up for the FREE iSPYETF Newsletter to avoiding missing part II of The Shameless, Obvious & Unreported Cheating Tricks of Politicians and Wall Street.

Federal Reserve – How to Tame the Monster it Created

Thanks to quantitative easing (QE) stocks are up 130% and more. The Fed created a monster of a rally, but how do you tame the monster without killing it? As the most recent Fed minutes indicated, it may be ‘easier’ than some think.

Never under estimate the psychological power of a dangling carrot. For years the Federal Reserve used the promise of more QE as an incentive (carrot) to drive stocks higher.

This has worked well. Too well. The Dow Jones, Russell 2000 and other major indexes are trading at all time highs and the Fed’s next challenge is to tame the monster (rally) it created without killing it.

How can this be done? Perhaps with the ‘reverse dangling carrot approach.’ Before we talk about the reverse carrot approach, let’s review how the ‘dangling carrot approach’ works.

The ‘Dangling Carrot Approach’

At how many post FOMC meeting conferences did we hear Ben Bernanke assure Wall Street that the Federal Reserve is ready and willing to assist?

From July – November 2010 Bernanke’s steady assurance was nearly as potent as QE2. Do you remember the August 2010 Jackson Hole summit? Bernanke then said: “I believe that additional purchases of longer-term securities … would be effective in further easing financial conditions.”

The placebo QE effect was strong enough to lift the S&P 18% before QE2 became official on November 2, 2011. Thereafter the S&P 500 rallied another 16% to the April 2011 high. QE2 ended in June 2011.

From October 2011 – September 2012 the Fed did nothing more than dangle the QE3 hopium carrot and the S&P 500 rallied 36%. QE3 was finally announced in September 2012, followed by “QE4” (replacement of Operation Twist by outright Treasury purchases).

Containing The Fed Monster – The ‘Reverse Dangling Carrot Approach’

From 2009 – 2012 the Fed talked up QE and stocks. Today the S&P 500 trades 135% above its 2009 low and the Fed knows it created a monster (rally). The Fed also knows that everyone else knows this is a phony funny money rally.

How can the Fed contain the monster it created – take away the punchbowl without causing a severe hangover. The ‘reverse dangling carrot approach’ is born.

Dropping hints about more QE contained the bear market, so dropping hints about reducing QE should tame the QE bull market. This process may have already begun.

The release of the Fed minutes on February 20, showed dissention among committee members about the duration and scope of QE.

Whether this division over the issue is real or just a new PR strategy to contain the Fed monster, I do not know. But we do know that stocks sold off right after the Fed minutes were released.

Just like controlled fires can stimulate a forest, the Fed may try to light ‘controlled burns’ to manage the stock market. As in nature, the summer time (starting in May) is a good time for a ‘controlled burn’ on Wall Street. Shareholders should plan accordingly.

I personally view the Fed like an unwelcome guest. Some guests bring happiness wherever they go. Some (like the Fed), whenever they go. Unfortunately, the Fed’s comment about leaving (scaling back QE) appear to be only a tease.