Quantitative Easing revisited‏

Due to recent events we thought it would be a good time to do an update on QE and its impact on the stock market. We have noted this connection, from time to time, in the blog. Now that we are probably in the tail end of this monetary cycle, the monetary base is in Primary V, this analysis should offer some insight into future monetary cycles.

When the FED initiated the first three programs: QE 1, QE 2 and OT 1 the market reacted with a rise of 1% for every $20bln purchased. It was quite fascinating to see the market rise in such a predictable fashion:

QE 1 $1.4tln Mar09 SPX 720 projected SPX 1224, market top SPX 1220
QE 2 $0.6tln Aug10 SPX 1065 projected SPX 1385, market top SPX 1371
OT 1 $0.4tln Sep11 SPX 1167 projected SPX 1400, market top SPX 1422

In June 2012, however, things began to change. This was the time Operation Twist 1 ended. Instead of ending OT 1 the FED extended it to year end by $267 bln. The market continued to rise but now it took $30bln in bond buying for it to rise 1%.

OT 2 $267bln Jun12 SPX 1356 projected SPX 1477, market top SPX 1475.

In December 2012 the FED announced QE 3: $45bln in Bonds and $40bln in MBS. This is $85bln per month for an unlimited period of time. At the time of the announcement the SPX was at 1428. It recently hit SPX 1687 in May, for a gain of 18% in five months. If we use the $30bln/1% for six months in June 2013 we have the following:

QE 3 $85bln/mth Dec12 SPX 1428 projected SPX 1671, market top SPX 1687.

So you see the $30bln for a 1% rise in the market is still working. Recently, however, they started talking about tapering and potentially ending the program by mid-2014. The market immediately sold off. If we assume the FED’s recent statement will create some uncertainty. This may lead to diminishing returns for QE 3. Instead of $30bln for a 1% market rise, or +2.83% per month. Let us use a flat 2% per month or about $42.5bln for 1%. This lower return still projects the following:

$85bln/mth until Dec13 projects SPX 1771.
$85bln/mth until Jun14 SPX 1942.

If we assume QE 3 will remain as it is until at least December, then the SPX should hit 1771 before then. When things change we will update this analysis.

About tony caldaro

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54 Responses to Quantitative Easing revisited‏

  1. budfox9450 says:

    Tony, I am coming up with 1530, roughly for a Low….
    Plus, possible short coming at 1680 ish…but
    60 min SP, has one hell’va +D…OTW – my BoYu
    remains on a sell signal, thru noon today….


  2. hucky2 says:

    I remember mentioning that we should see some more downside within the next few days.

    Maybe if I hadn’t mentioned it, the bulls would be having better luck today.


  3. manunidhi21 says:

    Namaste Tony!
    it all started at 1539 so must end at 1539 or so..


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