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.
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.
After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.
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.
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.
Source: Ciovacco Capital
