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Thursday, August 9, 2012


Listening to people on TV there seems to be a widely held perception that the QE programs from the FED are what drove the market up.  I think it is a little more complicated then that.  Lets look at the SPX chart marked with the announcements of the QE programs.

After QE1 was announced, the initial bounce faded into another big leg down.  The market had bottomed and was already moving up when the program was expanded.  The same thing happened with QE2.  By the time it was announced the market had already bottomed and was moving up.  Operation twist was actually announced before the final market low.  Was that a factor in the market making a low?  Maybe, but the market was in an extreme oversold condition at the time which seems the more likely reason.  The biggest percent gain came after QE1.  Although the market rallied after the other announcements, the return percentage was smaller. 

 The real driver of the market rally off the 2009 low has been earnings.  Check out this chart.

In the fourth quarter of 2008 earnings were still cratering and the market responded to that by continuing down in the first quarter.  This is why the original announcement of QE1 did not propel the market higher. In the first quarter of 2009 the earnings picture started to improve and the market responded to that.  In the rest of 2009 the earnings growth rate exploded and the market put on a massive rally.  The growth diminished in 2010 and 2011, but was still very strong.  The market again responded with big rallies after deep corrections.

I believe the only program that actually helped the market was QE1.  It poured money into the big banks that allowed them to turn their earnings around.  The financials are a big sector of SPX and they had caused most of the earnings decline.  When they got their feet under them, the earnings picture became much brighter.  During that time period there was massive stimulus around the world which also helped earnings considerably.  However, the other programs were totally unneeded and ineffective.  The GDP growth rate in the first half of 2011 actually declined considerably while QE2 was in place.  The economy has slowed so much during operation twist that we are either in recession or extremely close to it.  That does not seem like an effective program to me.

From what I have read it seems that nearly everybody expects a QE3 program, but nobody expects it to help the economy.  That is the last bullet the FED has.  If they fire it too early and the economy does not respond, the crash in the stock market will be huge.  Faith in the FED is helping to hold the market up in the face of a rapidly slowing global economy.  The FED must tread very carefully here.



Anonymous said...

You're right and the spiking gas refinery in Northern CA, and the growing concerns of California municipal Governments going bankrupt will trigger some market downward movement in the absence of FED decision. That's assuming the euro-zone negative news does not trigger as well. I'm on the defensive/short side in my trading, and to me now, the overall WW markets situation's are similar to a balloon in a room filled with razor blades!

Traderbob58 said...

That is an interesting analogy. There does seem to be plenty of razor blades around these days. I guess we will see if the balloon gets popped or not.



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