Helpings and Principles…

A few weeks back we looked at Gold, which had staged a rally that had many questioning sustainability. At the time I talked about the fact that Gold had been a “tell” on the equity market bull run that started during 2Q09 and wondered if in fact it might do so again. We all know what it’s done since that time and it’s safe to say a major contributor has been the assumption on the part of the market that the Fed would be forced to step in with yet another round of creative, quantitative easing—QE3, as it were.

Moreover, we’ve seen the INDU break through a major upside resistance level that had peeps at that time, especially DOW theorists, wondering if we hadn’t confirmed a sell signal that was gonna see the index, and likely the other broad indices, retrace to test much lower levels. Confirmed sell signal…not so much…

Fast forwarding to today and the Fed announcement regarding QE3 and the open-ended bond-purchase program ($40 mil monthly); we are indeed seeing some euphoric activity across the board in equity land.

But now that the news is out—some would argue it had surely already been baked into the cake— isn’t there risk of the “sell on the news” and “hangover after the party” activity in the coming sessions? Actually a certainty at some point, after the buy pressure dissipates…but that could be days to weeks and may or may not be sustained in nature or duration.

So, what next? While there are many questions, it’s a sure bet QE3 is bein implemented because the Fed is damn worried…period. Scuse me for stepping away from the party line, but that don’t sound so hunky dory for the U.S. or global economy over the short term. Factor the just released growth revision by the Fed calling for slow growth into mid-2015 and the picture brightens—NOT. Pardon me for bein a nudge, but 3 years out don’t sound so short term…or encouraging…

With all that said, it stands to reason that at some point the equity markets will begin to reflect the actual state of mess we are caught up in. Can QE3 be the answer that sets us on the path to sustainable economic recovery? Simple economic principle at play here—the law of diminishing marginal utility tells us we got the most utility from the first helping—QE1. Each helping thereafter has provided diminished utility. More simply stated, the first generous helping satisfied us. The second hit the spot, but left us with a little indigestion. This third helping is welcomed, given we’re pretty damn hungry, but as we approach the buffet, we realize that the fish has started to rot. My guess is that while the market will feast on QE3, it will do so while holding its breath and with its nose in the air—but feast, it will.

In reading this you might get the impression I see the market turning on a dime and headin south sometime soon… well, you’d be wrong. Been down this road way too many times to try to guess…or to underestimate the power of another certain principle…that of inertia. You know, Newton’s “a body in motion stays in motion” ditty.

Rather than spend a lot of ink doing so, I’ll let the picture tell its thousand or so words on what’s up and what appears to be going on… Fair to say the market is now in motion and seems heading in a certain direction propelled by that motion.

~LH