We've seen this market before

The history is repeating itself under the Fed's quantitative easing programs. Will this time be different?

By Minyanville.com Mar 11, 2013 4:01PM
Stock market report CorbisThe stock market rally since the beginning of the year is seemingly relentless. Regardless of whether the market-related news is good or bad, stocks keep fighting their way higher day after day. This, however, should not be mistaken as a signal for optimism about the U.S. economic outlook. Instead, the recent rally is purely the byproduct of aggressive monetary stimulus by  the U.S. Federal Reserve. And recent history has shown that such rallies do not necessarily continue forever.

At the beginning of the year, the Fed added the purchase of U.S. Treasuries to its latest third round of quantitative easing, or QE3, stimulus program. It has been no coincidence that the market has subsequently rallied almost without interruption ever since. The stimulus program effectively amounts to the Fed dropping off a $4.5 billion bag of cash on the doorsteps of U.S. banks each and every trading day. Thus far, this cash has leaked its way into the stock market. But such preferences can change at a moment's notice.

A look back at the Fed's previous balance sheet expanding monetary stimulus program highlights this point. In late 2010, the Fed launched QE2, which also included the outright purchase of U.S. Treasurys. And not long after the launch of QE2, stocks also entered into a seemingly relentless rally that lasted two and a half months.

What ended the rally back in mid February 2011? The outbreak of the civil war in Libya is often cited as the reason, but a view across asset classes suggests it was simply a rotation out of stocks and into other asset classes. In other words, market preferences changed, as stocks ground sideways for the remainder of QE2 while other categories such as precious metals, including gold and silver as well as long-term Treasury bonds, soared.

Today, stocks under QE3 are following a strikingly similar path experienced under QE2. Looking ahead, if stocks today were to happen to continue this pattern going forward, it would imply the current rally on the S&P 500 ($INX) would have another two weeks and +1.8% to the upside before hitting a comparable peak.

Exactly where on the S&P 500 would this peak occur? At 1,579, which just so happens to be effectively at the previous stock market peak first reached in March 2000 and revisited in October 2007. Given the fact that the stock market has approached this level twice over the last 13 years and subsequently went on to decline by roughly half, this level represents major resistance.
None of this means that stocks will fail this time around. After all, it's often said that the third time's the charm. So perhaps stocks will simply blow through this resistance and break out to new highs. But given the widespread risks that continue to overhang the global economy and its financial markets, it is worthwhile to pay close attention to markets at these levels. And exploring what other opportunities may be currently presenting themselves beyond the stock market would be at a minimum prudent. It will be interesting to see how it all plays out.

More from Minyanville
Tags: $INX
28Comments
Mar 11, 2013 5:21PM
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If you keep on priming the pump, sooner or later you're gonna flood the engine.
Mar 11, 2013 5:48PM
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I think the Federal Reserve should start printing all currency with some kind of Aloe additive...this way we'll have something soothing to wipe ourselves with when we're in the restroom.

Mar 11, 2013 7:15PM
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Less than 95 million shares traded hands on the Dow today.  If this were a broad-based rally, we'd see 10 times this amount.

Historically, stock market highs are usually reached with one last gasp, a desperate grab for the top, before they come falling down.  This is usually indicated by low volume.  Most of the investors have been left at base camp #2, and just a few are now reaching for the top of the mountain.  QE is an unknown variable that may prolong the ascent of the chosen few for the time being, but it has done nothing to bring the masses to the top of the mountain, nor will it ever do so in the future.
Mar 11, 2013 8:46PM
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Of course this is a scam. Always has been. 3 million scam artists collecting checks in this sleazebag industry. Our country is a total disgrace today. Cheats, crooks, and more crooks. Many of them in the financial markets. Bernanke is the biggest fool on the planet. killing savers and rewarding gamblers? Are you kidding me or what? WTF. 

You think any of these so called employees in the abyss called the financial markets are going to "come out" and admit investing has been steamrolled by derivatives, con artists, and the hedge funds? No. People are whores today. Anything for money. 
Mar 11, 2013 4:50PM
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Let's see what has been said:

 

Obama and Nancy "We don't have a spending problem"

 

Ok, OBAMA has raise teh federal budget from 2.9 trillion in 2008 to 3.8 trillion in 2012.  Hmm?  If OBAMA had just held spending flat we would nearly have a balanced budget.  But, no we don't have a spending problem, Obama only increased spending by nearly 1 trillion in four years.  Of course it is all the Republican's fault.

 

Obama said he "would be fiscially responsible"  He said he "would cut the deficit in half in his first term".  He said "unemployment would not go over 8%.  AFter four years it is still nearly that high after have been over 10%. 

 

Forget OE, just think what Obama's 20 trillion dollars in debt is going to cost in interest.  When interest rise to normal levels and we are paying 5% on the debt, interest charges will be 1 trillion dollars each year.  That is money that does not feed anyone, does not fund Medicare, or healthcare or ANYTHING.  And we will be lucky if interest reates stay that low considering the risk level of 20 trillion on the awy to 25 trillion in debt. 

Mar 11, 2013 8:25PM
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So...the market is going to crash...or maybe not.

Thanks for the tip!
Mar 11, 2013 9:46PM
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"Given the fact that the stock market has approached this level [S&P 500 = 1579] twice over the last 13 years and subsequently went on to decline by roughly half, this level represents major resistance."  That doesn't much sense since there's been a tremendous increase in average earnings per share of the companies in the S&P 500 over 2000 and 2007.  Not to mention inflation.  1579 apples in 2000 and bananas in 2007 do not equate to 1579 oranges in 2013.  The fact is that the average American was losing 1/2% per year in earnings to inflation from 2000-2007.  That has a lot to do with why it took so long for the S&P 500 to get back where it was in 2000.  Then, with the recession beginning in 2007 -and 2006 in real estate- the number was coincidentally about where it was in 2000 when the crash started to gather strength.
Mar 11, 2013 4:37PM
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To fuel the current optimism, we need to have a "national chant."

 

PRINT MORE MONEY !!!

PRINT MORE MONEY !!!

PRINT MORE MONEY !!!

Mar 11, 2013 5:43PM
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The only way to pay for the 1.1 billion in Obama's welfare programs is to print more money - period.
Mar 12, 2013 12:13AM
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History may tend toward repetition, but never exactly.  You can quote me on that.
Mar 12, 2013 12:11AM
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Calling a top, or a bottom, is a true fool's game--and not a Fool with a capital F, the Motley kind.
Mar 11, 2013 10:24PM
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I'm shorting the market right now.  It is overbought and overvalued.  The economy is improving, but the market believes it's all smooth sailing ahead and we know that's not true.  With Asia and Europe in the toilet where will businesses expand?
Mar 11, 2013 4:37PM
Mar 11, 2013 11:46PM
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No....I really don't think I've SEEN THIS MARKET before..??

 

Looks all NEW to me....

 

Has the DOW ever been OVER 14,444 in History ???...Let me go check my Charts..

 

Hmmmmmmmm....?

Mar 11, 2013 4:40PM
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Get Ready for the crash.....The media and the Markets are tiring to get you to bite hard. The trigger will be the next big incident The progressive Socialist President : OBUMER is full out ahead now with Mainstream Media's brainwashing help getting ready to collapse to country. Watch for the triggers on or around March 21, 2013  Look for an internment camp opening up close by to control" Domestic Subversives" That mean YOU when you do not like the Socialist views and Anti Gun Policies and Food and Electric Supply Cuts.....GET READY....TO DEFEND YOUR FREEDOMS...!!
Mar 11, 2013 4:31PM
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This guy just cannot admit that he is a dismal failure as a financial writer. Any kind of good news in the market is a downer for him.
Mar 11, 2013 4:36PM
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We know this "game"...and, it a bunch of phony BS!  Who cares what the "markets" do?  The layperson does not invest in them anyway regardless of what some may say, here.  It is a scam and a sham...
Mar 11, 2013 6:16PM
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The market`s valuation is fine.History will repeat it`s self.It will sell of when we get

a Republican President.Then we`ll have war,bear markets and hard times.If you want

that elect Jeb Bush.He can unite the poor people on an Arab war while the blueblood`s

wouldn`t participate but will have tax breaks for the rich.

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