QE Winners and Losers

QE Winners and Losers

Courtesy of  Springheel Jack

What effect has QE had on various investment classes in the past? Presumably, though not necessarily, we may see similar moves this time.

The chart below shows the losers from QE1 and QE2 charted against the SPX chart. Equities were a big winner both times. The losers were the US Dollar (USD) and bonds, represented on the chart by the $USD index and TLT (iShares Barclays 20+ Year Treas Bond), respectively.

I’ll focus on QE2 as a model. Like QE3, QE2 was implemented in a bull market, and equities had been rising. USD had been declining into the QE2 announcement. Bonds were also declining into the announcement, but turned around mid-QE and began a large bull run to a high in July 2012:

(click on charts to enlarge)


The next chart shows the winners from QE1 and QE2 charted on the SPX chart. In addition to equities, gold was a big winner. Both equities and gold were rising strongly into the QE2 announcement. QE2, like QE3 (aka QE-Infinity), was heavily trailed into the announcement. Both retraced somewhat after the announcement.

Oil and copper both did well during QE2. Both retraced slightly after the announcement and then rose strongly to the midpoint of QE2, and then topped out there. There were substantial declines after QE2 ended in equities, copper and oil. Gold continued to rise after the end and made a major top two months later:



During QE3, I think equities and gold will perform well again, with the best bullish setup being for gold. We may also see gains in copper and oil, but both have stronger ties to the real economy, which can pose significant risk and limit potential gains.

I’m expecting more downside on USD and bonds, but we may see both rally further before the declines get going. Problems in the Eurozone – which are unlikely to be fixed – are supportive of a strong US Dollar.

There is a large 68% bullish falling wedge on TLT that is warning of a possible retest of the 2012 highs in the next few weeks.

My retracement target on SPX, in the 1415 area, has not yet been hit. That target is at the support trendline of the perfect rising channel from the June low and the 50 day moving average:



Will the open-ended nature of QE3 change its effect on equities, commodities, the Dollar, gold or bonds – preventing a sell off at the end of the program?  There’s no way to know, but as Zero Hedge pointed out, there was a substantial run up before the announcement. If David Rosenberg’s calculation holds (every $40 billion of QE added to the Fed’s balance sheet adds ~20 points to the S&P 500), it is possible that not only has too much front-running occurred already, but the power of QE3 has largely been spent.

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