We have all seen a chart similar to the one below of the effects of QE on the stock market. When the Fed is buying the market moves higher and when it sells it helps the market move lower. Of course what we have all noticed, well everyone except for Buzz Lightyear at the Fed, is that each successive buy program has led to a smaller and smaller rise in the market. So the question is with a zero interest rate policy and with an additional and infinite buy program in place, at what point do we decide that maybe it is alright to fight the Fed? The more we look at it the more we think that their stance is sufficiently weakened that shorting may soon be, and indeed may already be, a viable option.
Looking at the situation from a smaller time frame the results are basically the same. Here is a table showing how Fed buy days compare against sell days as well as all days for the SP500. As you can see the out performance was fairly consistent since the end of August 2005. If you bought the market at the open on the day of a POMO buy and sold at the close you outperformed by a wide margin. If you held for 10 days you still were winning.
When we go to the latest finished action of operation twist however we can see that, like the large chart above shows, the effects of Fed buying have been drastically diminished. Buy days still outperform the SP500 by a small margin but does not fare so well against the sell days. Wen you take it out to 10 days the out performance is almost non-existent showing that Fed buying is not what it used to be.
All of this combined with out slowdown/recession forecast gives us more and more reason to look for shorting opportunities. If we are entering an earnings led recession and the Fed’s efforts are falling on investors with less and less force than it is getting closer and closer to being safe to fight Buzz Lightyear Bernanke and the Fed.
Disclaimer-In our model portfolio we are long TLT.