450 INSIDE 445 N WHAT QEINFINITY MEANS P. 1 440 LA THE CLEL POMOS SHOW MKT MOVES P. 2 435 c KET GOLD TO $2900?! P. 4 AR BC INDICATOR UPDATE P. 5 430 T TIMING MODELS P. 6 425 OR REP T-NOTE COT DATA P. 7 420 APPLE: THE GHOST OF RCA P. 8 415 Prepared After the Market Close, September 25, 2012 Report #419, September 26, 2012 Fed Turns Money 3.4 1700 3.2 Projected path with $40B/mo of MBS buys Spigot Wide Open 3 The FOMC answered all of the 2.8 1500 questions about whether there would 2.6 ever be a QE3 by announcing on Sep. SP500 2.4 13 that it would be doing more QE for 1300 the indefinite future. Even though the 2.2 past two rounds of QE have not had the 2 $Trillions 1.8 desired effect of resuscitating the pro- 1100 ductive economy, the Fed seems to be 1.6 adopting the slogan of “The beatings 1.4 will continue until morale improves”. 1.2 Size of the Fed's Balance Sheet 900 QE might not have done all that 1 was desired for the unemployment rate, 0.8 but it has been an unqualified boon to 0.6 700 the stock market, at least during the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 periods when it was going on. When the Fed tried to pull away the punch- modeled in what an additional $40 bil- well as the one below that looks at the bowl, we got the Flash Crash of 2010 lion per month would look like, assum- combination of the Fed’s balance sheet and the ugly decline of August 2011. ing that no counteracting changes were and the ECB’s. The lower line in the The FOMC’s Sep. 13 announcement made. That’s not necessarily a good bottom chart looks at a 3-month rate of said that the Fed would be buying up assumption, because banking shifts and change in the combination of the two $40 billion of mortgage backed securi- adjustments go on all the time. But it balance sheets, and you can see that ties (MBS) per month, with no sched- does help us to visualize what the there is a pretty good correlation. uled end date. The top chart compares effects of these big numbers would look The implication is that if the Fed is the behavior of the SP500 to the size of like. indeed going to be increasing the size of the Fed’s balance sheet, and we have And it is not just the Fed’s balance its balance sheet, and if the ECB is sheet which matters. Back on April 13 going to follow suit as Mario Draghi BOTTOM LINE we published a weekly Chart In Focus has announced, then we should see sev- By promising the markets the chance to article that featured the chart above, as eral months of a positive rate of change, pass “GO!” and collect $40 billion each 24% 1600 month, the Fed has changed the stock mar- Market went higher despite ket picture dramatically. More QE is defi- balance sheets shrinking: 20% nitely bullish for the stock market, but now May 2010 Flash Crash ensued 1400 SP500 we don’t know for how long. We still 16% expect stocks to run upward into Novem- 1200 ber, as suggested by our eurodollar COT 12% leading indication, but then we’ll have to 1000 see how the Fed is playing its cards. 8% T-Bonds and T-Notes are poised to fall in 4% 800 price from here (rising yields), as lumber’s rise over the past year points to a limited 0% improvement in the economy. That may 600 -4% End of contain how long the Fed keeps up this QE2 400 round of QE. Gold is due for a mid-cycle -8% End of dip as part of its 13-1/2 month cycle, with Total of ECB and Fed Balance Sheets QE1 in Dollars, 3-Month Rate of Change a bottom ideally in October. Gold does -12% 200 have an overbought condition to work off. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Report #420 will be published on Wed., Oct. 10, 2012 ©2012, McClellan Financial Publications, Inc. The McClellan Market Report p. 2 Report #419, September 26, 2012 and thus a rising stock market. 1480 40 The Fed’s actions within the bank- 1460 FOMC announces 35 ing system also matter on a daily basis, 1440 QEinfinity not just on the monthly basis shown in 30 1420 SP500 the charts on page 1. The chart here 1400 25 on page 2 looks at the net value of all 1380 Permanent Open Market Operations Scheduled20 1360 purchases (POMOs) done by the Fed. That plot 15 1340 or sales is shifted forward by two days, to take out the lag induced by the 4-day look- 1320 10 1300 $Billions back, and to reveal that the surges and 5 1280 pullbacks of Operation Twist correlate 0 nicely with the SP500’s behavior. 1260 Normally there is a pretty good 1240 -5 1220 correlation, but the FOMC’s Sep. 13 -10 announcement brought a big celebra- 1200 -15 tory rally for stock prices that was not 1180 Net Value of POMOs, Last 4 TD Sep. 12 part of the POMO program. We liken 1160 Shifted Forward 2 Days -20 it to when an asteroid falls into the 03/05/12 04/03/12 05/03/12 06/04/12 07/03/12 08/02/12 08/31/12 10/02/12 ocean, it tends to overwhelm the surf had resisted all the previous breakout going to be with that effort. Its mone- forecast. attempts. Anytime a trendline is broken tary efforts might get overpowered by One interesting point about this there is the expectation that there will fiscal changes that show up as a result POMO data is that the Fed tells us a be a pullback to or toward the trendline. of the elections, or from the resolution month in advance what it is planning to That appears to be what is taking place of the “fiscal cliff” by Congress. do, and then tells us the same day what now, with the Summation Index having Chart 6: The Volume Oscillator also it actually did. The red portion of the topped out and now in a decline from its put in a quite satisfactory high to con- plot shows the remaining portion of the lofty +3689 high. With no divergences firm the NYSE Comp’s breakout. It has announced purchases and sales, and it evident yet, the path should be clear to been more one sided than the A-D suggests that there is an up move com- higher price highs on the next Summa- Oscillator by spending much more time ing for stocks in the next few days. We tion up move. and at greater amplitude on the north will get the next month’s schedule on Chart 4: The Volume Summation con- side of zero following the June 4 low. Sep. 28. tinued its progression of higher highs With the Volume Summation up at such Bottom Line: Quantitative Easing (QE) and higher lows in September. In the high levels, it will be difficult for the may not have saved the economy yet, center of the chart, there was a much Oscillator to make more than low level but it has been bullish for the stock mar- lower divergent top on the Volume moves above zero. ket whenever it is used. Summation to go with the highest price Chart 7: The DJIA Price Oscillator ran highs of last spring’s top. With the to a higher high as the DJIA broke out Page 3 Charts Chart 1: The A-D Line has pulled back Federal Reserve continuing to pump up above the highs that it made last spring. down to its 10% Trend from the all time the economy with QE3, it is very A pullback to test those spring highs high that it made on Sept. 14. That unlikely that a final price top would be could be setting up the extension of the would be just a normal consolidation put in just as this new QE program is price move that would be expected with event, if it is able to stabilize near this getting started. The stock market did the Fed’s introduction of QE3. If the level. The lower left to upper right pat- not top until after the end of each of the Price Oscillator can stay up in the +100 tern on this chart is clear evidence that three prior programs, QE1, QE2 and the to +200 area, then a quite satisfactory the Federal Reserve is being effective in Twist. With no announced end to QE3 trending price move can result, just as it providing liquidity to the market. that could make identifying the end of did in the middle of the chart while Chart 2: The Daily Volume Line gave this current uptrend much more diffi- Operation Twist was taking place. a mighty effort, but was not able to cult. But its end should drive the Sum- Chart 8: The CBOE Volatility Index make a new higher high on Sept. 14. mations well below zero, just as the end (VIX) dropped below last spring’s low There has been an orderly pullback of the prior three efforts did. as the SP500 probed those price highs down toward the 10% Trend.