Stocks Go Cliff Hanging Anticipating QE4

NEW YORK (TheStreet) -- Stocks are hanging on to the fiscal cliff as investors and traders buy stocks in anticipation of the announcement of quantitative easing four when the FOMC meeting ends today.

QE4 is expected to be additional purchases of longer-dated U.S. Treasuries in yet another expansion of the Federal Reserve balance sheet, not an extension of operation twist.

I covered the announcement of QE3 on Sept. 14 with Bernanke Does the Expected and Then Some. I then noted that the major equity averages were overbought technically, and that stocks were overvalued fundamentally. I viewed the stock market as speculative.

Fast forward to Nov. 16 when I wrote, Go Over the Cliff? May Be Best Thing Then on Nov. 19, I wrote, Stocks Set to Bungee from Fiscal Cliff where I correctly called for the beginning a Santa Claus rally.

After QE3 was announced Sept. 13, the S&P 500 peaked at 1474.51 on Sept. 14. The Nasdaq continued higher to a peak at 3196.93 on Sept. 21. The Dow Industrial Average did not peak until Oct. 5 at 13,661.87.

Stocks declined from these dates into Nov. 16 as the focus shifted from QE3 to the risk that Congress and the president will allow the U.S. economy to fall off the fiscal cliff. Stocks turned on a dime on Nov. 16 on the prospects that House Republicans and the president would be able to forge a compromise.

Since then stocks have bungeed higher despite the continued cliff hanging stalemate, as the focus shifted to prospect that the FOMC will announce QE4 today. After the markets complete their reaction to QE4, the focus will shift back to the cliff. It appears to me that stocks may have set reaction high on Tuesday ending the first bungee rebound from the Nov. 16 lows.

It appears that both sides of the aisle can benefit politically by allowing the economy to fall off the fiscal cliff.

President Obama will get his way on raising taxes on those making more than $250,000. After the dive off the cliff his focus will be on re-instating the lower tax rates retroactively for the middle class. To get there he will have to agree on maintaining at least the equivalent in savings on the spending side.

Meanwhile House Republicans can say that they did all they could to protect the lower tax rates for all, and did not cave on their pledge not to raise tax rates. They should then lead a new measure to restore the lower tax rates for the middle class covered by additional revenue achieved by closing loopholes for the wealthy. With a net increase on the revenue side of the equation, the negotiations can begin on adjusting the spending cuts that were mandated in the Budget Control Act.

In my judgment the stock market will not like a total post-cliff environment that is not balanced and does not make a dent in turning back our growing debt problem. In this scenario the market will not care about the continued risky QE policies of the Federal Reserve.

Here's the scorecard of market volatility as investors focused on QE3, then the fiscal cliff, then on QE4, and then back to the cliff this afternoon or tomorrow in what I call cliff hanging.

Analysis of the Dow Industrial Average (13,248.44): Declined 8.7% from its Oct. 5 high at 13,661.87 to its Nov. 16 low at 12,471.48 as the market shifted from focusing on QE3 to the fiscal cliff concerns. Then from the Nov. 16 low to Tuesday's bungee high at 13,306.57 rise has been 6.7%. The Dow is still down 3.1% since the QE3 high. The daily chart is as overbought today as it was when QE3 was announced. My monthly value level is 12,826 with the QE3 high at 13,661.87.

Analysis of the S&P 500 (1427.84): Declined 8.9% from its Sept. 14 high at 1474.51 to its Nov. 16 low at 1257.60 as the market shifted focus from QE3 to the fiscal cliff. Then from the Nov. 16 low to Tuesday's bungee high Tuesday's high at 1343.35 the bungee rise has been 6.8%. The S&P 500 is still down 3.3% since the QE3 high. The daily chart is overbought today and was overbought on Sept. 13 when QE3 was announced. My monthly and annual value levels are 1378.6 and 1363.2 with the QE3 high at 1474.51.

Analysis of the Nasdaq (3022.30): Declined 12.1% from its Sept. 21 high at 3196.93 to its Nov. 16 low at 2810.80 as the market shifted from QE3 to the fiscal cliff. Then from the Nov. 16 low to Tuesday's bungee high at 3033.14 the rise has been 7.9%. The Nasdaq is still down 5.8% since the QE3 high. The daily chart was overbought on Sept. 21, but with Tuesday's rebound momentum is flat. My monthly value level is 2893 with the QE3 high at 3196.93.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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