The S&P 500 closed at another 5 year high this week at 1,465 as the introduction of QE3 provided a lift to asset markets across the globe. The S&P 500 is now within 110 points of it's all time highs of 1,575 that were attained in October of 2007.
A quick background note to readers - Quantitative Easing (QE3) has been a program where the Federal Reserve "Prints" money and uses that money to buy USA Treasuries. This activity will result in lower interest rates for borrowers in all credit markets (which is good for the economy). It also allows the Federal Government to run huge deficits because in order to run a deficit, the Government needs to have a buyer of it's debt - in the USA that debt is US Treasuries. Well enter the Federal Reserve who will use Quantitative Easing to print money to buy the debt (US Treasuries) of the USA government.
The S&P 500 is now up 120% from it's financial crises lows of 666 (yes 666 was the low). Technically speaking the S&P 500 has broken out of a classic double top formation. We alerted readers to this in last weeks commentary. Usually double top breakouts result in higher prices in the near term and this time was no exception. We illustrate this double top breakout in the chart of the S&P 500 at the Photo Section.
Fed & Bernanke Promises to Buy Mortgages (QE3) Forever?
On Thursday, Fed Chairman Ben Bernanke announced the widely expected QE3. In his announcement Mr. Bernanke pledged to spend 40 Billion a month to buy Mortgages. Now unlike QE1 & QE2 which had an ending date to their programs - QE3 is open ended - there is no ending date. The Federal Reserve is now pledging to keep buying mortgages and other debt securities until conditions in both the economy and the labor markets have improved significantly for a period of time.
The Federal Reserve has also pledged to keep interest rates low through mid 2015. They do hedge slightly here by stating they will take price stability (i.e. inflation) into consideration.
The reaction to Mr. Bernanke announcement of unlimited QE3 was again immediate. Financial markets rallied worldwide. As shown in the S&P 500 chart above, USA markets hit their 5 year highs of 1,465.
Also the "Alternative Currency" - Gold - got another boost this week from Mr. Bernanke's introduction of QE3. In the Photo Section is a chart which shows the explosive move in the price of Gold during the past six weeks as financial markets have anticipated the arrival of QE3.
We alerted our readers on May 19th at www.relianceria.com that we felt that Gold would outperform over the coming months. However, as bullish as we are on Gold - we do not recommend that investors add to or buy Gold now after this recent sharp increase in price.
Mortgage rates fell on Mr. Bernanke introduction of QE3 to their all time lows. This should provide another nice stimulus to the economy. With Mr. Bernanke promise to keep interest rates low into 2015, the housing market should continue to see a modest improvement going forward.
For our readers perspective - just to get an idea of how unique our current economic times are - In the Photo Section we provide a 40 year chart of 30 year USA mortgage rates. the current rate of 3.5% is indeed an economic phenomenon.
We have been bullish on USA real estate throughout 2012 and would urge readers that if your financial condition warrants that you should take advantage of these historical low interest rates. Housing prices in the southwest in places such as Arizona & Nevada are relatively inexpensive - especially when compared to housing prices across the globe.
Forecast For The Next Week
As discussed in the introduction above, a double top breakout is a bullish sign for a market. However, we are never chasers of a stock or any other asset who's prices are at multi-year highs.
The S&P 500 is 15% higher from it's recent lows that occurred on June 2nd. Therefore, now is a time to hold positions that portfolios are positioned long in and wait for an inevitable correction before considering adding new or additional long equity exposure in USA markets.
At this time, the overall stock markets are technically as overbought as they have been for the past three years. The Utility sector is the only sector that is not overbought.
Emerging Markets - after under-performing the S&P 500 for the past year, are trading at levels much lower than they have been for the past decade. We would recommend that investors start their due diligence with these markets as we expect the gap in performance between the USA markets and Emerging Markets to begin to close.
With the S&P 500 at 5 year highs and every sector technically overbought - we recommend investors to not chase USA equity assets at this time and at these levels. It would be best to wait for the overbought conditions to subside again before again putting fresh money to work in USA equities.