Fading the Fed as QE2 Embarks

Last week the market rose into the mid-week Fed Open Market Committee (FOMC) statement and fell after. This week the market rose for one day into the Bernanke pronouncement (breathlessly touted by CNBC) and fell hard after. This is a typical pattern of fading the Fed. 

Bernanke's comments did not inspire nor illuminate. What ZH inartfully described as the "latest compendium of mendacious vomitus emanating from the primary orifice of the Fed chairman" can be summarized in this line from Ben: "The outlook remains unusually uncertain." A riff on Rumsfeld's "known unknowns"? Worse, isn't the Fed culpable at least in part for uncertainty - especially after today? If too much leverage was the cause of the crisis, why would even more leverage be the solution? It appears the Fed is in a trap of its own making. 

The market reacted by reading Ben as about to embark on QE2, another round of quantitative easing. The Fed did not elaborate on what action they are prepared to take, but two-year Treasuries made a fourth record low in a week, and commodities popped today, probably on inflation expectations. 

 Note: given that commodities pooped, it is a useful coincidence that EWI is offering an Energy Free Week for their services. I wouldn't normally tout this except the jump in commodities today means something dramatic may be about to happen over in the pits. Worth at least checking this out.

Regardless, I believe that the inflationary expectations are ill-guided. Would QE2 drive inflation? Seems unlikely. Some reasons why:

• Mish thinks that Bernanke has met his match with consumer attitudes swearing off more debt. 
• The vaunted $1T of new reserves are not waiting to be lent out, but substituting for intrabank loans, so even if the Fed stops paying a nominal interest on them, do not expect the banks to suddenly start lending again - or the consumer to start borrowing. 
• Buying more Treasuries or MBS's will hold down long rates, but even with historically low mortgage rates the housing market is in the dumpster. 

To add fuel to the fire of creating unusual uncertainty, Bernanke was ambiguous as to how much QE2 he would actually undertake. As reported by the online WSJ (emphasis added):

Bernanke calls the outlook 'unusually uncertain' and notes that the central bank is prepared to take additional action if needed. His economic outlook sees lower than expected inflation and at best a slow pace of falling unemployment levels. He notes financial conditions are hindering growth and expects interest rates to stay low for an "extended period." At the same time, he says the Fed is continuing to think of ways to shrink its portfolio, and any asset sales will come gradually. Bernanke's comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn't suggest much central bank appetite to provide additional stimulus to a troubled economy. Stocks are taking it on the chin while the two-year Treasury yield is hitting yet another record low. The dollar is holding pretty steady.

The punditry will opine that stocks fell on the pronouncement, but they were falling all day from the opening gap up. That gap was closed, suggesting an exhaustion gap, a bearish signature. Today's STU was fairly sanguine about the market, ignoring the Fedspeak altogether and noting that the reversal back up was merely a day long and went back a normal amount for a minor degree wave 2 (60% in the Dow). In addition, they have seen a sharp spike to end rallies since the Flash Crash, and today was no exception: the gap up was due to enthusiasm about the Apple earnings after the close yesterday. The "gotta own it" stock was unable to sustain any sort of rally. After a possible gap down tomorrow, they expect another, smaller rally and then a rollover, which would be the dreaded 3 of 3 of 3 at four degrees. 

 The bullish Tony Caldaro has a different take:

Looking back, this market has now spent the past two weeks essentially between these two pivots [Sp1058 to Sp1099]. We continue to believe the market is currently building a base after the initial rally from SPX 1011 to 1099. The next couple of days should be important for this potential new uptrend scenario.

The bullish Carl Futia, who also thinks the market is building a base to run to Sp1145-1150 (consistent with the Big Tease count) had expected a start to it today, not the mid-day fade back down. Here is his mid-day chart from yesterday:

 

Tomorrow will give us a bit of a read, but the real threat is late Friday or next week if the STU Rollover comes to pass. 
 

Comments

[Hammer]

Geez I wish it would get on a trend and stop the whipping around.

[Vipasyana]

Hi,

Good observations.

Perhaps, last night's bump up in markets was tied to VIX options expiration this morning: Apple & Ben B was the media reason(the VIX options expire on 3rd Wednesday morning; they got the VIX index to come down to around 23)

[Roger D.]

Was it the possibilty of QE2 or is there a problem about to surface with the European banks? The Euro looks to have topped and todays 5 waves down by coincidence timed exactly with the markets break today.

Roger D.

[Chabazite]

So, Davey turns around to Barry and has a word in his shell-like and says 'Look here, old chap. This Keynsian nonsense really won't do. I know we Brits must take our fair share of the blame; after all, it was Gordon who started you off on this 'spending' tom foolery in the first place. But Gordon 's gone now and no one has heard a squeak from him since he got the boot - must have gone fishing or something. But Mervyn! God, he must be laughing his socks off. Never thought we would have the bottle to do some of the things we said we would. And he LOVES us. More importantly SO DO THE PEOPLE because we ain't bulshitting them any longer!' So Barry gets on the blower to poor old Bernie, who is all set to make this big announcement about how much money he was going to spend, and says four simple words. 'Not one cent more!'. Oh - and something like 'Scram!' God, you could have cut the silence with a knife. Kind of made Bernie look a bit of an idiot really. Goes on the telly and flounders around like flatfish. Out of ammo. Out of time. Out of ideas. Shame really. Markets ain't going to like it when they cotton on ... Another G&T old man?

[DG]

Geez I wish it would get on a trend and stop the whipping around.

As of right now, I see nothing to indicate this is about to occur. At best, we may have seen a low that will last for a while.

That said, as a trader you need to have two different trading strategies anyway. One for trending markets and one for non-trending, as well as a way to differentiate between the two.

[Lo Mein]

Latest Elliott Wave Theorist is now in video format

July 2010 Issue
http://www.youtube.com/watch?v=thMm-7RFsm0

[Roger D.]

Another broadening top. Don't be surprised if we don't crash out of this pattern. DAX,Nikkei,and Hang Seng most bearish as the bottom looks to be ready to fall out. The musical chairs game of tracking the Euro stops when it's lights out. Dangerous and wild market.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/446045e6-9597-4fad-9cdf-c82833d45241

[JT]

"Geez I wish it would get on a trend and stop the whipping around." - Hammer

The market is simply in a trading range. As a TRADER, you should be making a small fortune off these moves. I would suggest stop focusing on the S&P and actually take a look at how certain stock sectors are performing.... such as energy, mining, coal, steel, etc.

For example, Freeport Copper (FCX) broke out yesterday. TRADE IT!

[JT]

"Dangerous and wild market." - Roger

That's a pretty "rich" statement coming from someone that has nothing more than a "paper-trading" account.

:)

[Trader 123]

That FCX is a BEAST.
About to take out the June Highs!
So much for deflation...

[Mamma Boom Boom]

>Roger D., I'd recommend you put a blindfold on. Because, what's about to happen to you will be just too heinous to watch.

Posted by: Mamma Boom Boom | Wednesday, July 21, 2010 at 02:38 PM<

Seems like I can hear him crying in the disatance, "Ouch, oh, stop, damn, ouch , quit it, damn that hurts, ouch, ouch!"

[Roger D.]

Look all this market has done since the March '09 lows is track the Euro currency market,nothing has changed. The Euro has done 5 down and has just about completed 3 up. When it finishes and starts it's 3rd wave down these markets will follow. Look at BIDU this morning already has started down.

This market will crash atleast 500 pts down from here. I gurantee it.

Roger D.

[Trader 123]

Roger,

Can you please tell me how it is that we are in P3 when commodity/energy stocks like FCX and WLT are breaking out on the upside and are now trading above the 10, 21, and 40 day MA's?

You keep talking about the Euro and it's effect on the S&P and particularly on the commodity complex, yet you seem to conveniently IGNORE what is actually happening in the equity market.

Why is it that stocks like FCX and WLT are breaking out to the upside?

[JT]

1089 will violate EWI's count for minor 3 down. They are screwed again. Wrong again. And as usual, are completely incompetent.

[Hotch]

Those of you quick to dismiss Roger D would do well to remember that everyone is wrong once in a while. No doubt Roger has tight stops and good risk management. And need I remind you all that he is the only one who has been CONSISTENTLY right most of the time.

It is easy to be right once in a while. It is not easy to do so with regularity. Is Roger D a genius? I think so but the label is really irrelevant. It is about trading, being right, and MAKING MONEY. Not about insulting people because you feel jealous.

Good luck to all.

[Mamma Boom Boom]

>This market will crash atleast 500 pts down from here. I gurantee it.

Roger D.<

Whoooa Dude! Gotta be the puppy chow.

[Roger D.]

http://www.screencast.com/users/parisgnome/folders/Default/media/f7eba497-1a59-4444-802d-fc0fb983a26f

[Roger D.]

Reversal starting in the DAX and Euro.

[trendlines]

Hello yelnick, just a quick visit. SPX is breaking a crucial downtrendline to the upside. A close especially above 1100 in the next few sessions, might break the downtrend, and lead to a retest of higher levels. Watch out bears!

[twitter.com/DrBubb]

Robin Griffiths has a Turn (up to Down) on Monday, I believe.
Podcast: http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/6/26_Robin_Griffiths.html

[Biased]

I just completed a search of your blog for EWI free weeks using the search function in your sidebar. There appears to be some excellent contrary timing to these free weeks, that is if you're willing to go long for a short period after the free week makes its appearance, like now for instance.

cheers

[Dr. Know]

"Those of you quick to dismiss Roger D would do well to remember that everyone is wrong once in a while. No doubt Roger has tight stops and good risk management. And need I remind you all that he is the only one who has been CONSISTENTLY right most of the time." - Hotch

What meds are you taking?
I want some.

[yelnick]

Biased, yes - that has been noticed before, that an EWI Free Week almost always comes as their count gets blown up. Let me comment in a post.

[yelnick]

Chab - reads like Punch! Nice comment

[Les]

They're currently in QE 1.3.

QE 1.0 Commit to purchase 1.725 trillion dollars of securities by 4/10. Defer delivery on some in case system needs more liquidity (see QE 1.3).

QE 1.1 FNM and FRE commit to purchase 200 billion dollars in mortgages using the funds from QE 1.0.

QE 1.2 Regulate MMFs to require 30% holdings of cash-equivalents such as T-bills.

QE 1.3 Take delivery on remaining purchases as needed.
See http://www.ny.frb.org/markets/soma/sysopen_accholdings.html

[Michael]

"No doubt Roger has tight stops and good risk management."

Really now?

So where was Roger's stop for his shorts on this blow-up move to the upside?

Answer me that.