‘One picture is worth ten thousand words’ – Fred R. Barnard, Printers’ Ink, 10 March 1927
We don’t always agree with that statement. We write about 1,000 words each day for Money Morning, so if we could send you one picture a fortnight, it would make our job a lot easier.
Of course, while it may be easier for us, it would be less useful for you, and you’d soon turn off.
But sometimes a picture really is worth ten thousand words. This morning we saw a picture that condenses the past four years of stock market action into just two-and-a-half hours of market action.
In fact, if we’ve read this right, it could be the single most important image you see as it could reveal how the market will behave for the rest of the year…
Last night the U.S. Federal Reserve finished a two-day meeting. Beforehand the market was on edge…what would the Fed do?
Would it print more money?
Would it announce a change to interest rates?
Or would it announce an extension of the so-called Operation Twist program?
When it came down to it, the market got, well, exactly what it expected. As the following picture shows:
The black cross marks the time the Fed released its statement. The red line stretches from half an hour before the announcement to two hours after the announcement.
During that time, the market performed pretty much as it has done for the past four years. Traders (including short-sellers) and investors positioned themselves leading into the statement.
When the statement revealed no new money printing, the market sold off…but then recovered as short-sellers covered, realising the market wasn’t going to fall as much as they thought, and buyers bought cheap.
As the day continued, sellers sold as they realised the market didn’t have the momentum to rally much further. So by 2.30pm the market was back to where it was at noon…a lot of effort, time and money was expended, but the market had gone nowhere.
Even after a sell-off later in the day, the market still rallied to only close down by 0.17%.
In other words, what the market did in the space of two-and-a-half hours last night perfectly reflects what the market has done for the past four years…and what it will probably do for the next six months…and probably longer.
You could call it the ‘Treadmill Effect’.
If you’ve ever seen anyone on a treadmill at the gym you’ll know how it works. They get on there, jog and then run like the clappers for 20 or 30 minutes. The sweat is pouring off them and they look knackered.
Yet they’re still exactly where they were at the start of the exercise. And it’s the same for the market and investors.
So, what does this tell you?
It tells you the Fed is playing around with the runner on the treadmill. When they see the market fall, they want to make sure the runner doesn’t fall off the end of the treadmill…so they juice the runner up a bit.
In this case, the Fed is fiddling around with ‘Operation Twist’.
As the Fed notes in its statement:
‘The Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.’
In short, the Fed wants to lower longer-term interest rates to encourage businesses and homeowners to take out long term loans. Although you have to ask just how low the Fed wants these rates to go.
Already the yield on a US 10-year bond is just 1.63%. And if you want to invest in a US 30-year bond you’ll only get a 2.71% return.
That’s pretty slim pickings in return for locking your money away for 30 years.
Earlier this week, our old pal, Dr. Alex Cowie wrote to you about ‘Greece Fatigue’. He said the market was getting bored by all the news about Greece.
Well, right now the Fed is doing a pretty good job with ‘QE Fatigue’. That is, investors have been looking forward to it for so long and anticipating it so often that they’re getting fatigued. ‘Are we there yet?’ the market asks each month. ‘Not yet,’ the Fed replies.
Remember, the last time the Fed hinted at money printing was August 2010. It then started printing money to buy bonds in November 2010. That’s nearly two years ago. Yet each month since then the market has looked for the Fed to buy more bonds.
So far investors have been disappointed. Even the ‘Operation Twist’ and the ‘Return of Operation Twist’ aren’t what the market is really after. It’s just fiddling around the edges.
Our bet is that the Fed is happy with the manipulative role it’s playing. It’s teasing the market…stringing investors along. It’s not ruling anything out, but it’s not yet ruling money-printing in.
Investors have reacted to this by not selling stocks as much as you’d perhaps expect. And short-sellers are reluctant to drive prices down too.
Why? Because they’re afraid of missing out. What if the Fed prints tomorrow? The market could climb 5% or 10% in one day. No-one wants to miss that. And short-sellers don’t want to be caught short if the Fed decides to print another half-a-trillion dollars.
Ultimately, the Fed will print again. It’s just a matter of when. Odds are it will come at the point when the market is fed-up of asking. When buyers just don’t believe it will ever happen, and short-sellers finally pluck up the courage to place big bets.
So don’t hold your breath for money printing just yet. As we said yesterday, don’t bet your house on the market, but you should have some exposure to stocks. Because once the market is truly fatigued of waiting you can expect the Fed to hit the market hard…and you won’t want to miss that rally.
Cheers,
Kris.
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