Alan's Finance Blog

What Will Happen to the Stock Market When QE2 Ends?

Club EWI’s free “Independent Investor eBook, 2011 Edition” offers you an unorthodox view of the Fed’s quantitative easing program

By Elliott Wave International

The second round of the Federal Reserve’s quantitative easing program, better known as QE2, will expire this week.

The QE2 policy was officially announced on November 4, 2010, and has been widely credited with subsequent stock market gains. And now, according to rumors, the end of this “experimental” program will kill the stock rally — with potential impact across all markets.

Let’s think about that.

For starters, there is little “experimental” about QE2. As EWI’s November 2010 Elliott Wave Financial Forecast pointed out to subscribers, “In Japan, the very same remedy the U.S. is applying today — rate cuts followed by quantitative easing — finds its stock market still down more than 75% from its December 1989 peak.”

Also, this chart, from EWI president Robert Prechter’s January 2011 Elliott Wave Theorist, shows “the effect” the first round of quantitative easing (QE1) had on the market:

But investors have short memories. And even many of those who remember how powerless the Fed was during the 2007-2009 crash are convinced that “it’s different this time.”

What do the facts and the evidence say? Read the expanded, 2011 edition of our popular free Club EWI resource, The Independent Investor eBook.

From the very first pages, the charts and graphs will show you that the Fed’s QE programs are far less powerful than is commonly presumed.

Can the Fed and Economists Forecast the Future? See This Startling Chart

Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting

By Elliott Wave International

Business Talk Radio host Gabriel Wisdom recently spoke with Pete Kendall, Co-Editor of EWI’s Elliott Wave Financial Forecast. Their discussion included a crucial but rarely asked question about economists and the Federal Reserve. Here’s the relevant excerpt:

Gabriel Wisdom: “Ben Bernanke, the chairman of the Federal Reserve, says the economy is slowing but there’s faster growth ahead. Is he wrong?”

Pete Kendall: “Economists are extrapolationists. They tend to look at what’s happening in the economy and extrapolate that forward. So here we have a situation where not just Bernanke but economists in general are looking at… what they call the ‘soft patch’ and somehow contorting that into growth later in the year.

Pete’s startling reply flatly contradicts conventional wisdom. Most people believe that the Fed really is able to anticipate the economic future. After all, they’re the most “qualified.” But what do the facts say?

Pete’s Elliott Wave Financial Forecast Co-Editor Steve Hochberg recently included this eye-opening chart (from Societe Generale Equity Research) in his new subscriber-exclusive video, “Buy and Hold, or Sell and Fold: Where Are The Markets Headed in 2011?”

The red line in the chart is the S&P earnings, and the black line shows economists’ forecasts relative to those earnings. Here’s what James Montier, head of equity research for Societe Generale, said about it:

“The chart makes it transparently obvious that analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly.” (emphasis added)

That comment is spot-on. In 2002-2003, as you can see, earnings turned up despite economists’ forecasts for earning declines. It took them a while to “turn the ship around” and play catch-up with the trend.

Yet in 2007-2008, earnings turned down — despite the forecast by economists for continued increases. The devastating truth is that earnings did more than fall in the first quarter of 2008: they had their first negative quarter in the history of the S&P. As Steve said in his subscriber video, “Economists were wrong to a record degree” — and investors felt the pain.

So what’s the point? Economists do extrapolate the trend. That approach works fine, until it doesn’t­ — and you’re on the hook.

Elliott wave analysis never extrapolates trends — it anticipates them. The Wave Principle recognizes that markets must rise and fall — and that they unfold according to changes in investor psychology, in a way that is patterned and recognizable.

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Most people believe that the Fed really is able to anticipate the economic future. Now you know the facts. Uncover other important myths and misconceptions about the economy and the markets by reading Market Myths Exposed.

EWI’s free Market Myths Exposed 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. Download your free copy now.

Download 14 Critical Lessons Every Trader Should Know

Dear Trader,

You know how difficult it can be to successfully trade the markets. And although the volatility that we’re seeing lately offers great opportunities, it can also add to a trader’s frustration. That’s why our friends at Elliott Wave International are releasing one of their most popular trading eBooks, The Best of Trader’s Classroom, free through May 16.

Since 1999, EWI Senior Analyst and trading instructor Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. EWI reviewed over 100 lessons and selected these 14 that offer the most critical information that every trader should know.

Now you can download these valuable lessons in their 45-page Best of Trader’s Classroom eBook, free.

You’ll learn:

• Why Emotional Discipline Is Key to Success
• When to Place a Trade
• How to Set Protective Stops
• What It Takes to be a Consistently Successful Trader
• And 10 more!

Download Your Free The Best of Trader’s Classroom eBook Today
(Don’t hesitate! This offer expires May 16.)

Regards,

Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

How To Use Fibonacci Ratios in the Real World

By Elliott Wave International

What tools help you with the difficult task of identifying the market trend, riding it, and getting out before it reverses?

Consider Fibonacci ratios: Mathematical proportions by which moves on a market chart relate to each other. Fibonacci mathematics is an integral part of Elliott wave analysis; Frost & Prechter’s classic “Elliott Wave Principle — Key to Market Behavior” has an entire chapter on it.

And here’s an excerpt from a free Club EWI report on the subject. Enjoy — and for details on how to read the entire report free, look below.

How To Apply Fibonacci Math to Real-World Trading
(excerpt; full copy here)
By Jeffrey Kennedy
EWI Senior Tutorial Instructor
EWI Senior Commodity Analyst

It’s hard to imagine a wrong way to apply Fibonacci ratios or multiples to financial markets, and new ways are being tested every day. Let’s look at just some of the ways that I apply Fibonacci math in my own analysis. …

Elliotticians often calculate Fibonacci extensions to project the length of Elliott waves. For example, third waves are most commonly a 1.618 Fibonacci multiple of wave one, and waves C and A of corrective wave patterns often reach equality (Figures 7-3 and 7-4).

One approach I like and have used for a number of years is a “reverse Fibonacci” application… (Continue reading this free report now with a free Club EWI password.)

The 2011 Socionomics Summit in Atlanta: It will change that way you think about markets.

The Socionomics Conference offers the latest insights from this groundbreaking new science.

Socionomics is the fruition of Bob Prechter’s insight regarding social mood. This comprehensive theory is helping investors connect the dots from the past to the future to where they are right now. In this first-ever Socionomics Conference, Prechter will host speakers who are using socionomics in their work and research. Elliott Wave International has made it as easy as possible to attend — including an exceptional price, convenient travel access (Atlanta), and a venue close to the airport. Click here for information.

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The coming 2011 Socionomics Summit on April 16 in Atlanta will indeed discover “New Horizons” — which is precisely what this emerging science has done time and again in recent years.

Attendees will be able to hear, ask questions of, and mingle with 14 of the foremost academics, writers and researchers who contribute to the science of socionomics. Even now, their innovative work is helping to define the critical role that social mood plays in human affairs. The featured speakers include:

• Successful hedge fund manager Scott Reamer
• Indiana University professors Johan Bollen and Huina Mao, contributing authors of the widely-reported academic paper “Twitter mood predicts the stock market”
• Scholar and best-selling author of Mood Matters, John Casti
• Emmy award-winning Minyanville sage Kevin Depew
• The man who discovered socionomics, Robert Prechter

This list is just the beginning. Speakers also include the Socionomics Institute’s research fellow at the University of Cambridge, Matt Lampert, as well as in-house researchers Alan Hall and Euan Wilson, whose research continues to demonstrate how social mood drives social action.

Please know that the phrase “new horizons” is no exaggeration. As published in The Socionomist, our recent studies of social mood have anticipated a mind-boggling series of global trends and events:

• “War and Peace in the Middle East” (Dec. 2010) was weeks ahead of the violence and shockwaves of protest that changed the political landscapes of Egypt, Tunisia, Yemen, Libya and beyond.
• “Authoritarianism” (April 2010) forecasted increased internet regulation and warned of a possible cyber war — months before the WikiLeaks controversy broke.
• “The Coming Collapse of Modern Prohibition” (July 2009) anticipated the dramatic escalation of violence in Mexico’s deadly drug war. It also called for growing American tolerance of marijuana use.
• “Authoritarianism” (April 2010) warned of unprecedented new forms of government control even in ostensibly free countries like the U.S. Since then, news events include the advent of secret government GPS controls on cars, airport pat-downs and document checks on train travel inside U.S. borders.
• “The Developing European Tinderbox” (Dec. 2009) preceded the biggest story in Europe in 2010 — the re-kindling of old ethnic and national hostilities and the possible coming dissolution of the euro.

For more information about the 2011 Socionomics Summit: New Horizons in the Study of Social Mood, simply follow this link.

The Next Major Disaster Developing for Bond Holders

A must-read FREE report for investors in fixed-income markets like Treasury bonds, municipal bonds or high-yield bonds

By Elliott Wave International

Elliott wave analysis can warn you of trend changes when the rest of the investment public least expects a market reversal. With that in mind, we have created a new report for our free Club EWI members: “The Next Major Disaster Developing for Bond Holders.”

In this free report, you get some of the latest commentary on fixed-income markets adapted from various Elliott Wave International’s publications, including 2010 issues of Robert Prechter’s monthly Elliott Wave Theorist and its sister publication, The Elliott Wave Financial Forecast.

Enjoy this excerpt — and for details on how to read this important Club EWI report free, today, look below.

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The Next Major Disaster Developing for Bond Holders
(excerpt)

The Elliott Wave Theorist — October 2010
(By Robert Prechter, EWI president)

…History shows that investors have been attracted like moths to a flame to four consecutive pyres: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds. Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it. …

The Elliott Wave Financial Forecast — October 2010
(By Steve Hochberg and Pete Kendall)

The rise in optimism since early 2009 has allowed corporations to issue the lowest grade debt at a record rate, even more than in the middle of the incredible expanding debt bubble of the mid-2000s. The annual total of $189.9 billion to date is a record, and the entire fourth quarter still lies ahead.

This is a stunning testimony to just how desperate investors are for the returns they grew so accustomed to during the old bull market. The Moody’s BAA-to-Treasury spread (see chart in the free report — Ed.) has been widening since [April] and has made a series of lower highs in August and again in September. This behavior reveals an emerging preference for perceived safer debt even as junk bond issuance races higher. It is a critical non-confirmation…

Video: The Versatility of the Wave Principle

Video: The Versatility of the Wave Principle
Timeless Trading Lesson

In the video below, EWI senior analyst and trading instructor Jeffrey Kennedy shows how the Wave Principle can help you identify a high-probability trade set up regardless of the direction of the larger trend.

This timeless educational video was taken from Jeffrey’s renowned Trader’s Classroom series and is being re-released because of its valuable lesson. If a few minutes isn’t enough,
get more FREE practical trading lessons from Jeffrey Kennedy in his latest eBook.

Will Grains Gain OR Wane? Find Out For FREE

Futures Junctures Free Week has begun
September 16, 2010

By Elliott Wave International

Over the past few months, leading grain prices have climbed up the commodity wall like a “mile-a-minute” kudzu vine. From late June to early August, the big three grain markets (wheat, corn, and soybeans) soared 40%-plus in a coordinated rally to multi-year highs before leveling off.

The question on the minds of market participants is simple: Is the grains’ uptrend set to end?

Well, according to the mainstream experts, the answer is a definite NO — and an equally definite YES. See, according to recent headlines, grain prices are as likely headed for strong gains as they are for a world of pain. On this, following news items capture the very conflicting grain complex picture:

• “Wheat futures decline, fall most in two weeks after Egypt looks elsewhere for supplies… We have a bearish tone.” (Wall Street Journal)
• “Wheat Soars Despite Reassurance On German Crop.” (AP)
• “Corn Above $5-per bushel mark; prices expected to pull back.” (Cattle Network)
• “Corn (Soybeans) Still King… the bull market is intact for now.” (Farm Forum)
• “Grain Markets Are Hot: But Is It Too Late? One money manager believes the dance will soon be coming to an end.” (Minyanville)

I rest my case.

(Near-Term Opportunities On The House: On Wednesday September 16, EWI launched its famous Futures Junctures Free Week,providing all Club EWI members with instant, no-cost access to comprehensive near-, and long-term commodity analysis. Sign up today and take advantage of this amazing offer.)

Fortunately, there’s a quick and easy alternative to the mixed messages of the mainstream: the September 14 Daily Futures Junctures. In that publication, EWI’s chief commodity analyst Jeffrey Kennedy presents in depth analysis, labeled price charts, and live video commentary on all three grain markets — a total of 12 charts in all.

The best part is, you can get instant access to Daily Futures Junctures, along with its long-term sister Monthly Futures Junctures at the unbelievable discount of 100% off. This complimentary admission to one of EWI’s most exclusive subscriber resources is the benefit of Futures Junctures Service Free Week. The event runs from 5 pm (EST) on Wednesday September 15 to September 23. Sign up today and start taking advantage of this amazing opportunity.

It’s FreeWeek at EWI: Get charts, analysis and forecasts of Asian-Pacific and European markets

Greetings,

Our friends at Elliott Wave International have just announced the beginning of their wildly popular FreeWeek event, where they throw open the doors for non-subscribers to test-drive some of their most popular premium services — at ZERO cost to you.

You can access EWI’s near-term analysis of Asian-Pacific and European markets from EWI’s Short Term Update services (combined valued at $98/month) right now through noon Eastern time Friday, Sept. 10.

The timing couldn’t be better. Editor Chris Carolan has been on top of the recent market action in Asian-Pacific and European markets. This unique event only lasts a short time, so don’t delay!

Learn more and get instant access to EWI’s FreeWeek of Asian-Pacific and European markets now — before the opportunity ends for good.

Regards,
Alan

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Efficient Market Hypothesis: R.I.P.

By Elliott Wave International

Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical “Parthenon” of economics, this notion has consistently endured the test of time —– until now. Academics and advisors across the globe are currently exposing crack after crack in the “Efficient” model so deep as to bring the entire theory crashing to the ground.

“The EMH is not only dead,” writes a July 29, 2010 news source. “It’s really, most sincerely dead.” (Minyanville)

As to what caused the theory’s collapse — one recent business journal offers this insight:

“Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises.” (The Economist)

Here’s the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist. (Read that full-length publication today, absolutely free by clicking on the hyperlink) In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:

The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter’s 2004 Theorist takes the rein:

“The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority — financial market trends are based on little more than the shared mood of investors — how they feel — which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)… Buyers, in a rising market appear unconsciously to think, ‘The herd must know where the food is. Run with the herd and you will prosper.’ Sellers in a falling market appear to unconsciously think, ‘The herd must know that there’s a lion racing toward us. Run with the herd or you will die.’”

Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)

In the end, it’s not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.

As the mainstream media continues to jump on board Prechter’s Financial/Economic Dichotomy Theory, you can read both of Prechter’s original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the 2007 Journal of Behavioral Finance.

Read some of the latest nuggets directly from Robert Prechter’s desk — FREE. Click here to download a free report packed with recent quotes from Prechter’s Elliott Wave Theorist.