15,542 Dow and 1687 S&P – Today’s level is the market top - WITHOUT INCREASED QE.
I had not written a blog since April 5th 2012. The last blog entry I wrote was “the only chart that matters” which showed that while QE was going on the market went straight up and when it stopped the market went straight down. That was interesting at the time as they were TALKING about ending QE at this time in the coming months… Soon after that blog post QE-infinity (#1) was announced (40 billion per month in Mortgage backed securities)… the market decided that ONLY 40 billion a month was not enough and into November 2012 the market was heading lower again. That was when QE-infinity (#2) was announced… This was an additional 45 billion worth of treasuries on top of the 40 billion on MBS taking us to a whopping 85 billion in QE every single month automatically without an end date.
Since QE-infinity (#2) in November the stock market has never seen such a run. There has not been a single 3-day pullback. There has not been a single 5% pullback. In fact the S&P went from 1,343 when QE-infinity (#2) was announced all the way to 1687 today without as much as a single hiccup! That’s greater than a 25% rise in the market in just 6 months’ time with zero pullbacks, zero fear and just drifting higher day after day on 85 billion in liquidity looking for SOMEWHERE to go. I’ve looked back in time and have struggled to find any time in the stock market’s history where such a run occurred without a single pullback aside from the internet bubble in 1999.
I think things may be changing now though. First off the Fed’s balance sheet will be over 4 trillion in only 6 months’ time at the current pace of QE. It’s hard for even the Fed appeasing CNBC folks like Steve Liesman to keep a straight face when the balance sheet of the central bank gets over 25% of the GDP of the entire country. (4 trillion / 15 trillion)
In addition, I think even the Fed is beginning to worry about an asset bubbles at this time. When you have junk bonds trading below 6% yield for the first time in history even someone as thick as Bernanke starts to take notice! Dividend yielding stocks are up about 40%-50% ON AVERAGE during this run as people search for yield everywhere…. Even the most worthless, trashiest, laughable no profit stocks are going up 5% a week as all this money looks for a home.
For these reasons and because stocks have had such an epic run I think today’s S&P level of 1687 is a top but a large caveat needs to be thrown in here. There have been many times during this 4 year bull market where I thought the market had topped out and then the Fed came out and increased the flow of QE. In fact during this entire 4 year bull market although the talk has always been “When is the Fed going to stop QE? Or “When is the Fed going to taper QE” if you look the actual flow of QE has been INCREASING this entire bull market.
I believe the reason is simple… the market continues to NEED a HIGHER flow of QE in order to continue to move higher. The analogy of a drug addict is true. This is still true today which is why I believe today you just saw at least a short term top. Let’s see if the Fed is ready to increase the flow of QE again over the coming months. If they are willing to increase the flow of QE then the market can blow right through S&P 1687 and the 4 year stock bonanza continues. If they do not things could get ugly pretty quickly. The Fed has amazed me on the amount of risk they have been willing to take in the past to keep this rally going, let’s see if they can do it again.