Long Term Market Analysis: This QE3 $SPY $GLD $CRB

Drizzt: long term market analysis is a series once or twice a month where we take a look at longer term trends in the market to get our bearings right on the general direction of where market prices is going.

This week have been an eventful week. To recap, Ben Bernanke the Fed chairman announced that there will be a monthly purchase of mortgage backed securities at a pace of $40 billion per month.

The amazing thing was when asked what was the target they have in mind, they say they don’t have a target!

I am not an economist and I have no clue why the purchase of these securities. Perhaps some of you guys can explain to me. However, the flux of money into the market this time round will be as crazy.

Weekly S&P500 and STI

The long term indicator we use is the cross over between the 17 week EMA and the 43 week EMA. A cut of the 17 week EMA below the 43 week EMA from above signifies an underweight and risk management position. A cut of the 17 week EMA above the 43 week EMA from below signifies an overweight position in equities.

S&P 500

The SP500 have been much stronger than the emerging markets and we don’t see any signs of weakening. The moving average have been spreading out well but we should see a retest of the support near 1400.

STI

In contrast, STI have been rather sluggish since. The moving averages do not look to be turning but it will need some leadership from the big index constituents such as DBS, UOB and OCBC to lead It higher. MACD looks non-directional.

CRB

Long term wise, the Commodities index looks to finally turned the corner. Moving average looks to be converging and MACD about to move positive. There could be a retest where the moving averages converges (301)

What it means to me

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The last time there was a QE, the markets briefly went down for the entire month. If there is any indication this time it might be the case.

This rally for a lot of people are the most hated rally in years. Why do I say that:

1. China is slowing
2. Europe is in a Funk
3. The US faces a fiscal cliff and have shown signs of slowing down
4. VIX at an all time low

During October last year, many fund managers were betting on further declines after that crazy volatility. So much so that every one probably wish it didn’t go so crazy this year. It gives more weight to the passive indexing approach.

They saw a multitude of headwinds from Europe’s woes to the slowing U.S. economy and sluggish corporate earnings. Now, those defensive fund managers are facing what’s known in Wall Street lingo as the “pain trade”: having to buy stocks just to avoid being left in the dust. The longer stocks hold the summer’s gains, the more deeply the pain could be felt, forcing fund managers to start buying. That, in turn, could give stock prices another leg up and potentially generate a virtuous circle for the stock market and even more pain for those on the defensive. – TBP

We know there are easy money and low interest rate for probably 3 more years.

I am still debating what is the growth rate going to be.  I have a feeling it will still be limbo growth.

That would bode well for equities and dividend paying stocks. Corporate bonds will still do ok for those that borrow at 1% and buy 5% bonds.

However, at a certain point dividend paying stocks that focus on high yield and low growth is gonna hit a snag.

For a balance portfolio, having commodities exposure and GLD ETF exposure make sense. I am not advocating full on 100% but a portion of it should inflation ran out of control.

The reason why I am leaning towards this is probably that I have a feeling there are still folks that are 20% invested or fear money on the side lines. The longer this non direction is the worse they will feel this.

At the same time, the dividend stocks, they don’t seem to be boosting earnings. Earnings no grow, dividend payout don’t grow. Rising stock prices is just hot air.

In Singapore, the Government may not be able to stamp this rising property prices. Everyone will see property as always going up and the best hedge for inflation. They will throw caution to the wind.

I wonder if 2013 will be deflationary. How would that played out?

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