Federal Reserve Quantitative Easing vs. the SP&500 Index
This graph represents the relationship between the Federal Reserve Quantitative Easing Program and the performance of the S&P 500 Index. When the stock market and the financial systems began to collapse back in 2008, the Federal Reserve needed to step in and stabilize the system with the financial tools they had at their disposal. This time they had to use their balance sheet and the injection of money to support the system and stop the hemorrhaging that was taking place. This also acted as a foundation for the system to start repairing itself by using the massive amount of money to stabilize the system and bring confidence back to the market place. As you can see from 2008 to present the Federal Reserve has pumped a record setting amount of money into the system (Blue line). The result has been an unprecedented move up in the stock market (Red Line).
Strong growth markets tend to move higher at a 45 degree angle relative to strong economic data and a fully employed economy. Twice in the last 5 years the markets have been rocketing up at a 63 degree angle relative to economic data that was poor, however increasingly getting better and high unemployment which is not so good. The first time (2009 – 2010) the S&P 500 rallied at a 63 degree angle based on hope of a recovery and the new Federal Reserve stimulus. However, the markets were adjusting to the new stimulus but weren’t utilizing it efficiently. The second time (late 2012 – 2013) the Federal Reserve and the markets were in sync at an alarming rate. Both the Federal Reserve stimulus and the markets are at an unsustainable 63 degree slope. As the economy starts to show signs of holding its own (we do not believe it has) the Federal Reserve needs to begin to slow down (taper) injections of money into the system. When they do the market will have to reset (sell off) and find an efficient price level that will equal perceived corporate earnings and the growth rate of the economy on its own.
SHORT-TERM FORECAST: With all of these head winds, slower corporate earnings, seasonality, Fed tapering and a market that is at record price levels versus its own 200 day moving average, we believe that a -9% to -12% correction is needed. The red and green price levels to the far right indicate a -3.11% correction (50 day MA) and a -9.28% correction (200 day MA) respectively. The first level was reached last week and we feel that the next level could be reached in the next few weeks.
In the last week of July we raised our cash weighting to 20% and add a 12% short position (using ETF double down funds in the SP and NASDAQ) to the portfolios. With that said we remain committed to our forecast of a corrective move down of -9% followed by a strong 4th quarter rally to possible new highs by year end.