Open-Ended QE: A Game Changer For Stocks?

By: Chris Ciovacco | Mon, Aug 27, 2012
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There is no question central banks around the globe are moving closer to more easing and more money printing, which should provide a tailwind for stocks and commodities.

The European Central Banks' plan to possibly "cap" bond yields has been referred to as a "game changer". Not to be outdone, the Fed may have its own game changer in the form of open-ended QE (quantitative easing). According to an August 26 Reuters story:

"Some officials have said any new bond buying, or quantitative easing, could be open-ended, meaning it would not be bound by a fixed amount or time frame."

Before you decide "QE will have no impact or Jackson Hole doesn't matter", it may be helpful to understand how QE works in the real world. As we described in a series of quantitative easing videos, QE puts freshly printed money in the hands of the Fed's Primary Dealers, which includes Barclays Capital, Goldman Sachs, and Morgan Stanley. As shown in this flow chart, the fresh cash can also find its way into the brokerage accounts of primary dealer clients. Therefore, QE has a clearly defined path for the new greenbacks to make their way into the real economy.

$SPX (S&P 500 Large Cap Index) INDX

The video below reviews the current state of "risk-on vs. risk-off', using the performance of the S&P 500 (SPY) relative to intermediate-term Treasuries (IEF). While stocks face significant resistance, numerous technical indicators continue to lean toward a bullish resolution. The video points out numerous concerns that remain, including resistance and a trend of shorter and shorter central bank induced rallies.

When economic conditions are weak and global debt levels are elevated, investors understandably underestimate the intermediate-term importance of central bank intervention. Reuters noted the following on open-ended QE:

Because it would have no set limit other than the supply of Treasury or mortgage securities available, this method could eventually lead to very aggressive action, particularly if it is tied to an economic target - such as bringing the nation's 8.3 percent jobless rate down beneath, say, 7 percent.

With the S&P 500 facing significant resistance below 1,415 and a fragile situation in Europe, it is important that we remain open-minded. Over the past ten weeks, we have taken numerous positions in commodities, foreign stocks, and precious metals. Using an approach similar to what is outlined in the video above, we have been fortunate to post the following gains vs. our entry points.

Percent Change vs. Cost Basis

We will continue to give the bullish case the benefit of the doubt as long as the charts and central bankers allow. With potentially strong long-term S&P 500 resistance sitting between 1,403 and 1,415, flexibility must be coupled with any bullish stance.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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