Markets – Macro – Technicals

QE: The Hangover Part III

QEAs you know we’ve been very bullish for a bounce into the 1970’s $SPX. The speed of the Bullard induced recovery was mind boggling, but viewed in context of mutual funds desperate to mark up stocks ahead of QE ending it actually makes sense. We scaled short the last 2 days and yesterday’s reversal at a key weekly trend line has us potentially sitting in a very nice position to find out how this grand experiment turns out.

Now let me be superbly clear: Nobody knows how this all will turn out and so chest pumping by either bulls or bears is very much premature. To me it is not about that anyways. I’m results oriented and I want people to do well and it pains me to see so many in society do poorly while just a few are doing really well. I know many don’t care, but I have concerns how a society can do well in the long term if the masses are ever more worse off.

As the Fed is now indeed ending QE two big questions loom:

1. Can markets make new highs without QE and

2. Even if they do is it a sign of a healthy economy.

On the former question the proof is in the pudding. The fact is that very last time markets made a new high without QE was in 2007:

So markets have to prove that they can do this. As of now we have seen a break of long time weekly trend line and the massive rally we have seen has retested the trend line into July highs only to be rejected:

ES

At minimum it seems buyers have to get past this trend line to prove their case.

Likewise sellers have nothing to laugh about here. The recent rally has slaughtered many of them and the monthly chart lays out a minimum goal for them as well: Close the month below the monthly 5EMA, better yet the monthly 8MA:

SPX M

Note the recent rally got the bull/bear ratio back to a whopping 0.09. Everybody back on board and mark-ups are done. Good job.

But note something sinister: Despite the massive rally the monthly RSI divergence on the $WSLH remains as negative as the waning days of the doomed 2007 rally:

WLSH monthly

Even that massive monthly candle cannot hide that fact. And facts ultimately matter. To his credit even Alan Greenspan came out and called a spade a spade:

“Effective demand is dead in the water.” and the effort to boost it via bond buying “has not worked”. Alan Greenspan

Well what do you know. Somebody is breaking ranks and is acknowledging that the trillions upon trillions spent to levitate asset prices has not produced the stated goals: Economic growth.

How will this turn out from a pricing perspective? Hard to say. The powers of buybacks, jawboning and performance chase are still very much in play and these agendas have impact. If that’s the backbone of prices reaching new highs be my guest and I’ll trade it just the same, but from a macro perspective people should keep in mind that it does squat for the millions who are unemployed, underemployed or subject to shrinking wages and benefits. If you think that’s worth a high five and a few giggles ok. But as in the movie series the Hangover, the first one was hilarious and original, the second one was pretty funny as well, but by the third it all seemed strained and the laughs were harder to come by.

So QE is over, we got a candle and defined resistance on the $ES. Flat stops can keep us out of trouble on established short positions, and we’ll have an eye on some Fib retrace levels for next week:

ES fib

Yellen can jawbone this morning (as she tends to do), performance chasers and algos can chase stops, but QE is gone and global economic growth keeps shrinking while companies keep borrowing to buy back shares. They can because the Fed enables them via cheap money. It does not incentivize them to invest, but rather to financial engineer the illusion of earnings growth. 

Sellers want to see $SPX below 1962 by Friday. Buyer want it to close above. Below and a hangover may be coming to a QE rally near you.

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Categorised in: Daily Market Brief, Market Analysis

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