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The Fed’s “Not QE” And How We Are Playing It 10-25-19

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Market Review & Update Playing The Fed’s QE Sector & Market Analysis 401k Plan Manager Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha Market Review & Update “If you are a bull, what is there not to love?” That was the message from last week, as we discussed the reasoning for our increase of equity exposure in portfolios on an opportunistic basis. Of course, besides the fact we are moving into the seasonally strong period of the year, the primary reasons for the increase in equity really came down to two simple factors: Trump moving the put the “trade war” to rest (as we previously anticipated.) The Fed moving to increase bond purchases and effectively launch QE4 (more on this in a moment.) As noted in Tuesday’s discussion: “Readers are often confused by our more

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The Fed’s “Not QE” And How We Are Playing It  10-25-19


  • Market Review & Update
  • Playing The Fed’s QE
  • Sector & Market Analysis
  • 401k Plan Manager

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The Fed’s “Not QE” And How We Are Playing It  10-25-19


Market Review & Update

“If you are a bull, what is there not to love?”

That was the message from last week, as we discussed the reasoning for our increase of equity exposure in portfolios on an opportunistic basis.

Of course, besides the fact we are moving into the seasonally strong period of the year, the primary reasons for the increase in equity really came down to two simple factors:

  • Trump moving the put the “trade war” to rest (as we previously anticipated.)
  • The Fed moving to increase bond purchases and effectively launch QE4 (more on this in a moment.)

As noted in Tuesday’s discussion:

“Readers are often confused by our more bearish macro views on debt, demographics, and deflation, not to mention valuations, which will impair portfolio returns over the next decade versus our more bullish bias toward equities short-term. That is understandable since the media wants to label everyone either a ‘bull’ or a ‘bear.’

However, markets are not binary. Being a bear on a macro-basis doesn’t mean you are only allowed to hold cash, gold, and stock in ‘beanie-weenies.’ Conversely, being ‘bullish’ on equities doesn’t necessarily mean an exclusion of all other assets other than equities.”

This is an important point.

Our job as investors is to capture gains when the reward outweighs the risk and protect our capital when risk is prevalent. 

After a sloppy summer, the markets had gotten oversold to a more extreme level which provided the support, and the “fuel,” required for an advance with the right catalyst. The Fed’s “QE” was the “match that lit the fuse.” 

While the bulls were able to string together a decent rally last week, they were unable to capture new highs for the market.

The Fed’s “Not QE” And How We Are Playing It  10-25-19

While the markets are “risk-on” at the moment, the oversold condition has now reverted to a more extreme “overbought” condition which limits a further advance from current levels. A correction back to the 50-dma within the next week or so would not be surprising.

However, between now and the end of the year, there is still room for an advance. This is why we are suggesting adding exposure “selectively” and “opportunistically” on pullbacks. As shown below, the market is now trading below its previous bullish trendline advance which provides resistance to a further advance to about 3100-3300 curently.

The Fed’s “Not QE” And How We Are Playing It  10-25-19

Given the market is not grossly overbought on an intermediate-term basis, (yellow highlight box), there remains potential upside into the end of the year.

This technical backdrop, combined with the Fed’s QE program (I know, it’s not QE), is why we continue to maintain a long-equity bias in our portfolios currently. We have slightly reduced our hedges, along with some of our more defensive positioning, but remain well aware of the risk currently, which is why we are also maintaining a slightly higher than normal level of cash.

The Fed’s “Not QE” And How We Are Playing It  10-25-19

Playing The Fed’s QE (Not QE)

On Thursday, the Fed announced that they will nearly double the daily repo liquidity operations to $120 billion, as well they said the sizing of the 14-day term repo programs would rise from $30 billion to $45 billion. For the most part these daily and term repo operations have been oversubscribed, meaning there is more demand than liquidity being offered by the Fed. This growing problem is a reason for the recent announcement of QE (not QE).

(For more on “Repo” read this.)

As noted by Zerohedge on Thursday morning:

In a statement published at 1515ET, precisely when the S&P ramp started (on Wednesday), the New York Fed confirmed it would dramatically increase both its overnight and term liquidity provisions beginning tomorrow through November 14th.

‘The Desk has released an update to the schedule of repurchase agreement (repo) operations for the current monthly period. Consistent with the most recent FOMC directive, to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation'”

Lance Roberts
Lance Roberts has sharpened that lens with 30 years in the investing world from private banking and investment management to private and venture capital. Lance Roberts’ perspective and common sense analysis is sought after by media outlets such as Fox 26 News in Houston, CNBC, CNN and Fox Business News along with numerous publications including the Wall Street Journal, USA Today, Reuters and the Washington Post. Roberts is the Editor of the X-Factor report and publishes the blog Daily X-change.

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