It's almost too QEasy

When I last updated it was March of 2011 and the Bernak was dutifully manipulating markets "higher than they otherwise would be" via Quantitative Easing 2. Not unlike Microsoft Windows these things need to be updated constantly to kick the can further keep up with the times. Versions 1 and 1.5 didn't do it, so 2.0 was unveiled in August of 2010.In March the Smart money was just starting to move out of the market as seen in the above chart, and I made my calculations...

The Bernak has tried to make investing "so easy a caveman can do it" FED QE. You buy long. so I decided to chart how far $2.1 Trillion buys you in SP-500 points in the last post. Please reference the math in that if you'd like but the nuts and bolts was a close below SP1295 (it actually hit 1249. Darn Tsunamis). Then, a vertical gap-reversing non-stop march to new highs with a target of 1385. Kind of like this one that went to the rally high of 1370. QE2 Ends in June, just 8 trading days and a paltry $30-50 billion of Market Manipulatin' goodness left.
So where does that leave us? Now that EVERYONE knows how the game works, the time-trusted practices of statistical analysis, mean reversion, FUNDAMENTALS (what the hell are those?) that have been rendered mute by the Bernak will re-emerge, however briefly. How briefly? Glad you asked. David Tepper, manager of the Appaloosa Hedge Fund, famously called the QE2 rally spot on. The money quote when asked "what's going to go up?" "EVERYTHING". And how. Since last August gas has doubled, corn has quadrupled, cotton is up 50%, wheat is up 70%, oh crap wait that's not because of the FED. Ben said so, and he wouldn't lie. The SP-500 went up another 35%. THAT was because of the FED. None of the other stuff. Got it?

I digress. The market will not be making new highs without Mr. Ponzi or "the Ponz" as I like to call him making another apperance in the form of QE3. The bottom 90% of America has only been participating in the "Recovery" by massive defaults on nearly every form of debt, not earning more money. They're getting really pissed about all those price increases in food, fuel, basic necessities and everyfuckingthing except their paycheck that the Bernak is NOT responsible for. (On that note Ben says that without wage inflation, there is no inflation, if that makes you feel any better.) The "political will" isn't there for another "stimulus". Ben famously referenced Milton Freidman's "dropping money from helicopters" in regards to helping the economy and earned the moniker "helicopter Ben". In the interests of logistical honesty let's call him B-52 Ben because how in the hell would you fit $2.2 trillion in choppers?. B-52 Ben has had to close the money-bomb bay doors for a time to let things cool off. While this goes on, the SP-500 will fall. Why? The classroom rule the Bernak has instituted FED QE. YOU BUY LONG. has predictably created the inverse rule as well in the real world FED NO QE. YOU NO BUY LONG. What else would you expect when asset prices are, in Bernake's own words, "higher than they otherwise would be"? This result seems painfully obvious even beforehand to anyone that didn't grow up in the vacuum of academia, but seems to elude the Bernak, at least publicly. In his world, only good things (stocks up) come from printing money. Must be nice (if you're getting the money).

Here is the current SP-500 with the 50% Fibonacci retrace of the QE rallies. David Tepper was on CNBC recently and was asked when (not if) there would there be QE3. He said a 200 point-ish drop in the SP-500 ought to do it. When David speaks, Ben listens. At 1295 today, 200 points would drop us right onto the 38% Fib retrace at 1090, with the technical brick-wall 50% retrace below that at 1020. David Tepper doesn't say things on CNBC flippantly, so it's no coincidence the technical levels are right there at the "200-point-ish" range. Expect QE3 when the SP-500 gets to this range. I'd say late in the year October/November right when Wall Street bonus season kicks off. Get folks feeling "wealthy" for Christmas. Then short the ultrashort ETF's until 2-3 months before QE3 is scheduled to end. So easy a caveman can do it, right GEICO?

Addendum: As the market has been going the down in anticipation of no more free money for a few months, Bloomberg pointed out today (6/27/11)that while QE2 is ending, QE 2.5 is only just beginning.
Fed to buy $25 billion a month in Treasuries after QE2

Ponzi ON!

The market is, predictably, up nearly 1.5% on this news. Expect it to behave exactly like QE1.5 (the period between QE 1 ending and QE 2 beginning where the FED did the same thing). High volatility, frequent gaps (usually upwards for no apparent reason) and essentially a suicide environment for shorts and short term trades. Longer term, the market will be going nowhere, fast and mostly overnight. If you value your depreciated cash, you'll wait for QE3 like the big boys. After all...we know it's coming.
Addendum 10/26/11
Markets at 85% Correlation an 80 year high