Watching the Patterns

 | Apr 11, 2013 | 8:24 AM EDT  | Comments
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(Note: I will be traveling for the next few days. My next column will be published on Tuesday.)

With the release of the Fed minutes on Wednesday, I again heard so many say, "This will end badly." After considering this for a while, here's what I came up with.

The Fed embarked on a quantitative easing (QE) policy in late 2008. The market bottomed in March 2009. As we entered the spring of 2010 the Fed was in the process of ending QE and the market went down. I realize it has been three years now, but in May 2010 we saw the flash crash and the BP (BP) oil spill in the Gulf of Mexico. The S&P 500 fell about 20% that summer.

In August, Ben Bernanke showed up at Jackson Hole and laid out a plan for a second round of QE. The market promptly bottomed. The market climbed rather relentlessly until the spring of 2011, when that particular round of QE was on the verge of ending. The market managed to fall. In the summer of 2011 once again we plunged almost 20%.

At Jackson Hole that year we did not get an announcement of QE but a new plan called Twist. Within five weeks, the market made a low and went relentlessly higher. Operation Twist was coming to an end last spring and what did the market do? It fell, although this time it was only about 10%.

Yet clearly the Fed could not stand it, since in September they announced never-ending QE, which is where we are now. The market faltered for a bit in the fall but since then, it has been onward and upward.

I am sure there are folks who will say it's the great earnings that are driving this rally, or they've give the "nowhere else to go since cash is trash" argument. Whatever it is, you have to admit that we have only been able to see a market decline when there is no Fed program engaged.

So for those who say, "This will end badly," I ask you this: If the Fed ends the current program and the market falls, since that has been the pattern for the past four years, what makes you think that a market decline won't then prompt them to put another program back on?

I am not a Fed watcher the way so many who are much smarter than me are. I am a pattern watcher, and that's the pattern I see. When the Fed program expires or ends, the market goes down, and then the Fed comes in on its white horse to the rescue. So what do you see that you think changes that pattern?

And that's probably why the fact that there were only just over 300 stocks at new high on the NYSE doesn't matter.

NYSE Overbought/Oversold

Or that the Nasdaq finally surged to a higher high with a mere 177 new highs.

Nasdaq Overbought/Oversold

Or how about that news after the close that PC shipments plunged 13.9%? Lately, any bad news has not mattered. The market used to care about bad news, now it is only another reason for the Fed to keep the program going.

New Highs With Nasdaq

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