FED’s adjusted monetary base

When the FED started increasing the monetary base exponentially in 2008 we started tracking its growth in Elliott Wave terms. Our first piece on this topic was published in November 2010: https://caldaro.wordpress.com/2010/11/29/feds-adjusted-monetary-base/. Then, we expected the monetary base to bottom just under $2 tln and expand to $2.5 tln in the coming months. We followed that piece with an update in April as the base was reaching the targeted level: https://caldaro.wordpress.com/2011/04/01/feds-adjusted-monetary-base-2/. This weekend, with the current economic situation in mind, we reviewed the FED’s recent chart to determine if it could provide any clues of another Quantitative Easing program in the near future. It did, and more!

In our last review we labeled the monetary base expansion as five Primary waves (I-V). We expected this last increase, Primary wave V, to top at around $2.5 tln making it shorter than Primary III. In Elliott Wave analysis the third wave of any sequence can not be the shortest. This is what we just observed.

Notice this last increase in the monetary base ($742 bln) has already exceeded the increase during what we had labeled Primary III ($630 bln). Therefore the rise from early 2009 to early 2010 can not be Primary wave III. It must now be a wave of a lesser degree, i.e. Major 1 of Primary III. We have adjusted the wave count on the monetary base accordingly. This analysis suggests that we will not only have a QE 3 program in the near future, to complete a Primary wave III, but it will either be extended, like QE 1, or followed by a QE 4 program after it expires. Since QE 1 ended in June 2010, and QE 2 ended in June 2011, QE 3 is likely to be started in October/November and last until June 2012. An extended QE 3, or a QE 4, will follow and end in June 2013. The FED has recently provided some clues to fit this potential scenario.

At the conclusion of the August FOMC meeting the FED issued this in their statement: The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. They followed up this meeting with an extended two-day FOMC meeting in September. Former chairman Alan Greenspan was also invited. At the conclusion of this meeting the FED issued this in their statement:  To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The first item of interest is the extended period the FED plans on holding down Fed Funds rates, mid-2013 or June 2013. The second item of interest was the implementation of the $400 bln “Operation Twist” with a sterilized approach (selling short term treasuries to purchase long term bonds) ending by June 2012. The third observation is that the meeting was originally scheduled for one day, increased to two days, and former FED chairman Greenspan was invited. This suggests the FED created a game plan going forward. FED chairman Bernanke certainly did not need two days, and Greenspan’s presence, to suggest and get approved a sterilized program like Operation Twist by the committee. Notice June 2012, and June 2013 dates have already been mentioned. When we take into account all the various bits and pieces of data we track. We conclude the FED is likely to start a $1 tln QE 3 program in the next couple of months. They already know what a program like this would accomplish, in terms of the economy and the stock market. We will know for certain before year end. Best to your investing!

About tony caldaro

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94 Responses to FED’s adjusted monetary base

  1. Just Lee again says:

    H D will u do the honors of calling it ?

    • H D says:

      PIVOT T!ME

    • zimbabweanimike says:

      Hey Lee, confused about the map.
      Glad your out of retirement. The red or black thing has a powerful tug to it.

      • Just Lee again says:

        Haaa I’m just a hyper hypo Mike
        And I thought I saw something to share I’m all about today.
        The map shows states that have deregulated electricity/gas or just gas or just electricity
        The states that look like pee yellow are my #1 ‘s

      • CB says:

        Mike , you’re making me feel bad. Hey, it looks like there are only 2 things that can put me out of my misery: 1/ a chronic case of # 6 , or 2/ some helium and a large plastic bag 😉

      • zimbabweanimike says:

        I see some of all of them in me. That no 11 is not here!
        It is important to always be confident in you endeavors. Have some edge in a sector. Or like Lees years in that building. Or your field of endeavor. Something.

        Gold and slv are not my only game. I blunder elsewhere also!
        No offense to anyone.

      • CB says:

        Yeah, Mike, it’s easy to complain, but someone has to do the job, right? & some of it is nonsense..anyway the good news with most of that stuff is that if you aware that you have it, then you really don’t have it 🙂 except #11,of course if you don’t have it, then, well, you don’t have it ..lol

  2. zimbabweanimike says:

    While not eagles these guys are easy to work with and the price reflects current trading spot.
    They use to have gold at spot and 100/50 oz bars.( back when T first wrote about the mkt) Fwiw Libiya has dumped at least 20 percent or more of there gold. Be careful. Gl

  3. H D says:

    1155=.382 back, HWB @ 1168 pivot GL. Looks corrective from the low.

    • Just Lee again says:

      R2 pivot also here in ESZ
      Get some H D !!!
      Should be some big Bucs this year in my area ..Lots of feed and hot does

      • Just Lee again says:

        also globex high.
        guys got ran over today both ways unless ur on Twiiter then 99 winners 1 scratch on average. I can’t wait for Qe 4

      • Just Lee again says:

        Im not bearish…disclosure

      • H D says:

        Ur not bearish? I’m all about gettin some. Overbought, HWB, Pivot Should I wait for a tweet?

      • Just Lee again says:

        H D
        Welcome to the world where Gold breaks $100 overnite and no one gets stopped out.
        Where guys post 5 handle winners and take 50 handles heat.
        Twitter fever …catch it 😛

      • H D says:

        yep! Meanwhile ZW channels perfectly for 180+ points :mrgreen: Don’t tell the cool kids. Golds the talk of the town.

        Too much risk in metals for me.

      • Just Lee again says:

        ESZ and SPX back in last weeks Fed day range and its also something else..anybody know what it is ?????

  4. M1 says:

    Back to my NDX projections…. two scenarios:
    1. wave b of B/2 or wave i of C/3 is unfolding. 2035 is a crucial support.
    2. If 2035 is broken, it may suggest we may have a bear flag pattern as well as SPX. Possible targets: abt 1747 for NDX and abt 900 for NDX.

  5. kjb0 says:

    Thanks for the great analysis Tony.
    Looks like we are going to the 1170 – 1185 area. If we break that, I got a bad feeling we are going back up to 1240 area to complete a very complex and unorthodox wave iv.

  6. vishal409 says:

    Tony today’s low in silver has to be THE bottom in silver, what’s your preferred view at this time, the steep correction gives a doubt that forever rally us over isn’t the correction from the top TOO STEEP?

    Silver in india hit lower circuit in rupee terms I tried buying from 3 vendors but no one would be ready to sell, it’s quite frustrating will never ever touch spot Mkt again, even as we speak it’s quoting at 8% premium

  7. rc1269 says:

    Good morning, Tony

    I’m curious what your upward stop is where you would once again reconsider the count? ie, if we break through 1146 or 1168 pivots…?

    Market once again acting inconsistent with the counts it seems to me, but maybe my sentiment is premature. During the entire July 22-August 9 downtrend, the 60-min RSI never once broke over 70. Yet we’re breaking through that strongly right now. Does that seem consistent with the beginning of a 5th wave down? I assume this rally would count as minor 2 (or minor b) of int V, is that correct? (assuming the spx count materializes)

    Thanks, as always

    • tony caldaro says:

      RC, short term charts suggest the 1168 pivot range would turn things positive again … short term. Market has been quite volatile with sideways activity for weeks: 1102 – 1231. Eventually we’ll get a trend confirmation either way. Still waiting. This will clear the count.

  8. Just Lee again says:

    Every single move is according to plan ..the ups the downs the sideways
    The thinkers get left behind the bloggers change their names the perma bulls/bears say they told u so.
    Back up and you’ll see whats next

    Thanks Tony

  9. scatman12 says:

    Tony I have one question. Given that gold has been going sideways for few weeks and recently sold off, is this short period enough to conclude the correction is over.

    How does one account for this in OEW?


  10. Just Lee again says:

    It has begun
    Silver stuck a low this am and Gold also
    .be careful shorting rest of the year IMO

  11. pas1968 says:

    what a crazy day on the markets today!
    Here in Oz we were up 1% in am when Us futures were up 1% and we ended down over 1% as US futures dropped to be down 1%. Liquidation of USD carry trade again smashing commodities during Asian session. Asia mostly down, Hang Seng was down almost 4% at one stage.
    As Asia was closing Europe opended down 2% and is now up 2% with US futures up over 1%.
    I suspect Asian markets will begin to rise when USD carry trade liquidation is over and valuations come into play. Like I said, crazy day so far.

  12. lightbearer7 says:

    Tony, your critical support level for silver at $26 is amazing! The futures fell all the way there, touch and zoom off as if scalded by boiling water! Let’s see if that support hold for the major 4 correction (i hope it does :))

  13. laralda says:

    Hi Tony

    Your uncanny insight and total impartiality in developing these potential scenarios must be applauded – guess that’s why you write this blog and I am merely a reader ;o)
    Unless I’m totally missing your point here – this recent “revelation” creates a scenario for new record all time highs for the SPX – eclipsing the previous by a wide margin. So just to be clear – you are suggesting a possibility of the following:
    Mar 2009 low to Apr. 2010 high = wave 1
    Apr 2010 high to July 2010 low = wave 2
    July 2010 low to current levels = wave 3

    Being that we have already lapped over the April 2010 high removes the possibility of the recent downtrend being a wave 4 – suggesting this bullish scenario – we are still in wave 3 and the recent downtrend from April’s high of 1363 to current levels represents merely a correction with waves 4 and 5 to follow. Applying basic Fibonacci principles – I arrive at a SPX level of nearly 2100 – taking out the current all time highs before the conclusion of this current wave 3.

    Although there is no guarantee that the Feds monetary policy will always have a positive effect on the market in general – the recent reaction – certainly suggests otherwise ;o) While I do agree the Fed has little choice but to resume their QE programs, as time goes on, I envision these programs losing their effectiveness – in fact I believe we are witnessing yet another bubble in the making – a currency bubble – and I shudder to think of the consequences when this one bursts. Your comments or rebuttals are always welcome and very much appreciated.

  14. Fits in with the 5th and final wave down here, which so far cant seem to break 1101 yet. We also must consider a 3-3-5 pattern from 1370 is out there, for primary 2 bottom over 5 fibonacci months. A new bull cycle is possible especially with a major QE3. We shall see, but I’m seeing sentiment running 25% bulls in surveys, massively high VXO index, major oversold indications, and a 5th and final wave already about 50% of wave 3 as it is (at 1102 futures lows). So… it does seem like its time to be getting long while everyone is rushing into money markets with no yield. Best of luck to all… we are long Gold as of Friday.

  15. M1 says:

    It’s amazing, Tony… so I guess this may change you gold projections…$6000 ??

  16. Igor says:

    I will continue my thread from”weekend update” here.
    So, the S&P energy sector caught my eye recently. Tony has XLE in wave 4 down and, I suppose, expects wave 5 up later up to recent highs or even higher.
    I am not going to discuss or argue with this count, it’s enough for me to know that Tony with his huge experience currently thinks that higher prices ahead. I took a look at XLE from different perspective. The S&P Energy Sector Bullish Percent Index recently plunged to historical lows.
    Two last times it was at such low levels occurred in August ( $8.5 rebound after that) and in March 2009 (we all know what happened after). From historical perspective XLE is extremely oversold. So I would expect a strong bounce. How far and for how long I don’t know. But I think that from risk/reward point of view this sector deserves attention. I should mention that there is no buy signal yet and XLE can go lower, but rebound from such oversold levels, based on the previous XLE price behavior, is always fast. Actually, there is also the small positive divergence between the price and BPI in Aug and Sep and +D on MACD and RSI.
    A few words about what to consider an oversold level on BPI chart. Thomas Dorsey, the PnF charting guru, wrote that their group considered an index in oversold conditions if its BPI chart plunged below 10%.
    Analyzing XLE holdings we can see that it consists of 42 large cap companies. Technically speaking, 2 of them represent natural gas utilities and should be considered utilities companies. For better estimates I have the theoretical custom made portfolio of each market sector. My energy sector portfolio includes 217 stocks with different market capitalization and IMHO serves as a better representation of the energy sector performance. I manually draw BPI on each sector because stockcharts don’t have such function. On Friday BPI of that portfolio fell below 10%, confirming the overall oversold status of the energy sector. Actually the energy sector is the only one which BPI is below 10%. I think this information would be interesting for some of you.
    Not trading recommendation, just my personal observations.

    • CB says:

      Igor, thanks. You have a knack for investigating new things in great detail and then explaining them in a very understandable, simple way. Energy certainly looks interesting. Btw, I am not sure whether you already know it or not that Lee is getting into the energy deregulation business, which could only mean one thing…that energy prices are going to start to bite….so here we have two experts saying that energy is bullish…hmm, definitely something to think about. 🙂 Igor, I am sure I’ll have more questions for you later on, if you don’t mind …in the next few days I am gonna be really tied up with something else, though, so I won’t really be able to focus on stocks too much. Great effort on those P&F charts, Igor. Thanks .

      • Igor says:

        Anytime CB. And btw after 10 years of studying different aspects of TA I still don’t consider myself as an expert. lol As Russian proverb says “Learn as long as you live”.

    • tony caldaro says:

      thx Igor, much appreciated

    • CB says:

      Igor, I’ve said so…so it’s not negotiable, OK? Lol…
      Seriously, Igor, you are en expert at asking questions, so you can pretty much get to the bottom of anything whenever you want to.

  17. pas1968 says:

    Tony, you thinking more downside ahead forcing Europe to take action or Europe action is coming and markets may not necessarily go down from here? I think I read you say 1120 is a line in the sand for you?

  18. ggok1 says:

    Hi Tony
    Interesting article. How would this fit with your wave counts? Would it marry up with a wave B of the major ABC or 2 of 12345 or do you think this bear Market will be finished by OCT/nov and QE 3 comes in to start a major bull for a few years into 2013?

    In the past QE Has led to a major rally, so not sure how a bear Market would continue.


  19. Just Lee again says:

    Thanks Tony

    I see the new count in Silver.
    There was never a doubt 😛
    I’d rather make money than be right …maybe next time I will 🙂 But till then buy buy buy

  20. zimbabweanimike says:

    Same fractal as food stamp usage.

    More q = more food stamp folks.
    Crazy world we live in.

  21. mike7x says:

    Thanks for this additional weekend update Tony! If I understand you correctly, you imply in your conclusion that a new $1 trillion QEIII program would create a huge stock market rally, to be followed by a market top and a new, and significant, bear market?

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