Q2 Review & The Fed Put

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Look At The Forest, Not Just The Trees:

It is important to step back every so often and look at the forest (intermediate/long term action), not just the trees (short term action) and that is the primary purpose of this update. Also find a few annotated monthly & quarterly charts attached for your review. 

Strong Month & Quarter:

Barring some unforeseen massive decline before the close today, the benchmark S&P 500 (SPX) is on track to close higher for the month and quarter. Q2 was a very strong quarter for stocks and we are in one of the longest quarterly win streaks in history. The SPX has not had a down quarter since QE 3 began at the end of 2012! Eventually the market will pullback but until it does it is important to resist the urge to fight this very strong tape! Additionally, the SPX has only had 3 down months since QE 3 began back in Q4 2012 which is very bullish. 

The Fed Put:

I’m often asked why is the market able to rally even though earnings and the broader economy remain lackluster at best? My answer is, the only thing that matters is the Fed, everything else is secondary. This concept was first introduced by the legendary hedge fund manager, David Tepper, over 4 years ago and became known as the Bernanke (now Fed) Put. The idea is that the Fed will step in and do whatever it takes to support Wall St if the market decides to fall (for any reason). So it is a matter of time until Main St catches up and kicks into gear. 

Easy Money (QE) Matters:

Keep in mind when Q1 ended the SPX fell 17% and when Q2 ended, it fell 22%. Meanwhile, when QE of some-sort is present, the market roars higher. Remember, the market looks forward and fundamental data that is released by definition  looks backwards (tells you what already happened). That’s why, whenever any economic or earnings data is announced- we always ask, how will the Fed react (more or less easy money)?

Future Looks Strong:

The good news is that since the March 2009 low, the second half of the year has been much stronger than the first half which is why we are looking forward to a very strong second half of the year and beyond!


SPX Monthly Chart:

SPX- QE monthly chart

SPX Quarterly Chart