The most bullish analysts on Wall Street are cheering the Fed’s latest move.
“The bull is back,” the analysts declare. “The Fed’s decision to buy distressed debt, junk bonds, and high-yield exchange-traded funds (ETFs) is a gamechanger.”
But is it though?
Let’s set aside the fact that the Fed has no authority to make such purchases. It would be a blatant violation of its powers under the Federal Reserve Act of 1913. Then again, the Fed has been acting outside of its powers for the past 12 years. So, why stop now?
For argument’s sake, though, let’s concede that the Fed is going to do what it says. It’s going to expand its balance sheet by trillions of dollars by taking this unprecedented step.
Is it really a “game-changer”?
I don’t think so. Here’s why…
Back in 2008, the stock market was falling. The economy had dipped into a recession. The mortgage market was imploding. The nation’s banks were on the verge of collapse.
Then, on November 25, 2008, the Fed rode in to save the day with a program called Quantitative Easing (QE). The Fed announced it would do “whatever it takes” to shore up the banking system and keep the economy from collapsing. In 2008, this meant the Fed would buy longer-term government bonds, and other assets such as mortgage-backed securities on the open market.
It was an unprecedented move. Many analysts called it a “game-changer.”
Take a look at how the stock market behaved once the game was changed. Here’s a chart of the S&P 500 from 2008…
The S&P 500 rallied hard following the QE announcement. Many analysts declared “the bottom is in,” and “the bull is back.”
Most of the gains occurred in the week following the QE announcement. The stock market then chopped back and forth for about another month. Then the bear hit it with another swipe of its paw.
The S&P 500 fell more than 25% from the early days in January 2009 until it finally hit bottom in March. The index retested its November 2008 low, failed the retest, and dropped even lower.
That’s something to keep in mind as more and more financial television talking heads cheer that the Fed has saved the day… that the bear market is over… and that the Fed has indeed changed the game.
I don’t know… maybe it has.
But, then again… maybe not.
Best regards and good trading,
P.S. Whatever happens next, I’m preparing my paid subscribers to profit through my weekly Crash Course sessions.
For the next 9 weeks, every Monday at 8:30 a.m. ET, I’m putting on a live-streamed, half-hour training session. I’ll show my paid readers what I’m looking at before the market opens for trading, and what specific trading ideas I have on my radar. Plus, anyone in attendance can submit questions that I will try to answer at the end of the session.
Now, members of my elite membership tier Jeff Clark Alliance will be able to access all 10 sessions. But I’ve made a special exception, so all my paid readers can join for the first three. And if you aren’t able to attend live, you’ll have access to a replay for as long as you’re a paid subscriber.
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Today in the mailbag, subscribers chime in on Jeff’s first-ever Crash Course…
This 1st Crash Course session was one of the most informative I have ever seen. Jeff integrated so much in a concise and easily understood manner. I like not having a Q&A session at the end and letting him address any relevant/important questions in the next session.
I will be referring back to this session many more times for my own education. Jeff… much appreciated. Great job.
That was outstanding, Jeff. I learned a lot. Thank you.
And a subscriber thanks Jeff for a winning trade in Jeff Clark Trader…
Jeff, thank you for the XLF call option trade this past week. I made a 138% profit. I closed my computer 15 minutes before your sell email.
At the end of the day, after seeing your email, I closed the XLF call option with a sell to close limit order… I am enjoying my lifetime membership.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].