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I’m A Buyer

S&P 500 Trading Range

In an earlier post we talked about the dark blue line on the chart above being a support level, and if it broke we would see additional downside.

When the support broke, we used that as an opportunity to rebalance client portfolios – reducing exposure to small/mid-cap and increasing exposure to non-cyclical large caps and large caps with above average dividend yields.

We made our sales and have been slowly buying the replacement holdings. Today, with all of the bad news out of Europe, the news of much lower job growth than anticipated in the US, and China PMI dropping to a 5-month low (PMI is the Purchasing Manufactures Index and represents expansion or contraction in manufacturing activity), the market opened down a percent and a half this morning.

We have stepped up the purchases/reinvestment of the cash generated from the sales the past couple of days based upon my belief that we will see news of additional quantitative easing coming from the Fed at its next meeting (if not before).

The anticipated QE3 (the third round of quantitative easing) will be a narcotic for stock prices. Look at the graph below so you can see how stock prices have reacted historically to this level of monetary stimulus:

Quantitative Easing's Impact

I’ve drawn vertical lines on the graph above to show you the different time frames in which quantitative easing has been used by the Fed to stimulate the economy. The blue vertical lines show when the QE begins and the black vertical lines show you when it ends. The last set of lines shown are technically not QE – it was an effort to sustain the level of liquidity that the original two QE’s generated, so it was name Operation Twist. However, you can see it had a similar impact on stock prices.

There are two main reasons for my belief that we will see another round of quantitative easing: (1) the problems in Europe are inherently deflationary – something that scares the Fed much more than inflation ever will; and (2) the unemployment picture in the US is not getting better.

Fed Chairman Bernanke is a student of deflation and truly believes that the only way to combat it is to flood the economy with newly printed money – hence his nickname “Helicopter Ben” due to his quote about the Fed should drop dollar bills from helicopters if it sees any signs of deflation.

The Fed also has a dual mandate to increase the level employment in the economy – and with the employment number today being well below consensus expectations, they will feel the need to act.

As I write this, the market is starting to flatten out from the initial sell-off.

S&P 500 Today

This chart shows you today’s move in the S&P 500. The initial downdraft of sellers has stalled but buyers (other than me) haven’t really jumped in yet – many are banging their heads against the wall because they missed a chance to sell at higher prices instead of looking at the potential opportunity ahead.

Every sector in the S&P 500 is down today – so it really is a buyers buffet for those that believe stimulus is coming. But, unless you think I am the lone wolf in believing that Qe is coming, check out Gold:

Gold Rally

The big jump in gold today indicates to me that the smart money is also betting on stimulus which will eventually decrease the value of the dollar.

In coming days, I’d look for various Fed Governors to start talking about the positive impact that the economy could see from additional QE. That will get buyers interested and start to move prices higher.

Until then, we will continue to put the cash we have on hand to work in anticipation of Fed stimulus. One thing history has shown, you do not want to be in cash when QE starts.

Will QE fix all of the structural problems in our country? Nope – but it has shown that it can lead to higher stock prices which is critical for investors. Until the structural problems are addressed, we won’t see a new sustained bull market in stocks but more of this up and down we’ve seen during 2011 and 2012.


Hope You Enjoy Some 80\'s heavy Metal

Mark