In 2012, Operation Twist and the LTRO 1 and 2 programs ran out of gas so the lofty perch above the 200-day MA once again identifies the market top. ECB's Draghi pledged to support the euro by all means necessary in July 2012 which placed a floor in markets. The ECB announced the OMT program (that has yet to be fully implemented) and the Fed, again in a coordinated step, said they will supply QE Infinity as far as the eye can see. This creates the market buoyancy and top in September-October 2012. The Fall 2012 sell off occurs as price seeks to revert back to the 200-day MA once again, but the Fed comes out with both guns blazing in December 2012 announcing QE4 Infinity and Beyond which replaces the Operation Twist program with outright purchases at 85 billion per month which is ongoing (the POMO Pump link in the lower right margin highlights the daily Fed money pumps that boost the equity markets each morning).
The price loftiness above the 200-day MA identifies the February top, and pull back, but a reversion to the 200 does not occur and the bulls recover. The BOJ starts printing money like there is no tomorrow, throwing their hat into the global currency debasement ring. The BOJ actions (weaker yen) is the main cause for the bullishness in equities from March to the present as well as the recovery in the European bond market. Markets are simply moving higher on central banker easy money. The SPX prints another lofty level above the 200-day MA one month ago identifying another top and potential reversion to the 200-day MA, but, alas, the bears have the rug pulled out from underneath them once again.
That takes us to today. Price is 1617.50 and the 200-day MA is 1465.42 resulting in a 9.4% price elevation above the 200. Note that the reversions back to the 200-day MA should occur with more frequency such as the period from late 2011 through 2012. The longest period where price moves above the 200 to where it reverts is from September 2010 through June 2011 with the QE2 pump, 10 months, which is a very similar situation to now. QE2 created an intense upside market push just like QE4 Infinity and Beyond, the ECB's OMT and the BOJ easing is performing now. Price moved above the 200 in November 2012 and remains above 7 months later longer than what would be expected to remain at elevated levels. The QE2 money pump printed the market peak in April 2011, about 8 months after price poked up through the 200-day MA. That would place the current markets at their peak using QE2 as a guide. With all the ongoing bullishness, it is doubtful that anyone expects a 9 or 10% reversion to the 200-day MA as the spring and summer play out. Further, the door is always open to an overshoot to the downside since price does not typically bounce directly off the moving average. It is not unreasonable to project a potential 7 to 15% equity market sell off as the months move forward. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.
Hi KS,
ReplyDeleteI have one question if you don't mind.
I observed on ES-futures of spx that on the weekly charts the upper BB curbed to the downside and the lower BB executed a swift up-movement.
What does this mean?
Should I read this (the curbing upper BB) as a limitation to the upside at that level?
Or the markets starts building a congestion zone on weekly chart of ES?
Thank you,
V.
V, the bands provide the limits where a reversion of price should occur. Sure, the curling over to the downside of the upper band could portend downside market action ahead but that is likely too much to read into the bands; they should be used as more of a simple tool, simply noting price level in comparison to the upper and lower limits. If the bands do start to converge inward that will set up a squeeze where price is then sent violently up, or down, out of the tight band sqeeze but this would likely not set up for a few weeks. The bands appear less effective on longer term charts since price will tease along the limits and you are never quite sure if you have a touch to indicate a reversal, or not. Using the bands for the daily chart is a better indicator and SPX cash price violated the upper limits over the last couple days.
DeleteThank you, KS.
DeleteV.