QE Winners and Losers

I’ve been holding off talking about the likely winners in QE3 until the likely initial retracement on equities had played out, and that looks close now so I’d like to talk this week about the effect that QE has had on various investment classes in the past, in the expectation that we may see similar moves this time.

The chart below shows the losers from QE1 and QE2 charted against the SPX chart. Equities were a big winner both times so SPX is just on this chart for reference. The losers were the US Dollar (USD) as the chart background and bonds, represented on this chart by the $USD index and TLT respectively.

I’ll be looking more at QE2 as a model as QE3 looks more like it so far and was also implemented in a bull market period where equities had already come a long way up from the 2009 lows. In QE2 USD was already declining sharply into the QE2 announcement and was bottoming out as QE2 ended. Bonds were also already declining into the announcement but bottomed out halfway through QE2, starting a large bull run into a high in July 2012:

The next chart shows the winners from QE1 and QE2 charted on the SPX chart. The big winners were equities and gold. These were already rising strongly into the QE2 announcement, as like QE3 it was heavily trailed into that announcement. Both retraced somewhat after the announcement with the longer retracement on gold.

Oil and copper both did well in QE2, though less well than equities and gold. Both retraced slightly after the announcement and then rose strongly into about halfway through QE2 and topped out there. There were big declines after the end of QE3 on equities, copper and oil, with gold continuing to rise after the end to make a major top two months after QE2 ended:

What are my picks for QE3? Equities and gold again, with the best bullish setup here on gold.  We may also see gains on copper and oil, but both are tied more strongly to the real economy, and that is in significant trouble here, so while they may hold up at least, gains are likely to be limited.

I’m expecting more downside on USD and bonds, but we may see both rally further before the declines really get going. Continuing trouble in the Eurozone is supportive of USD at the moment and there is a large 68% bullish falling wedge on TLT that is warning of a possible retest of the 2012 highs there in the next few weeks.

My retracement target on SPX has not yet been hit, and that ideal target would be at the support trendline of the perfect rising channel from the June low and the 50 day moving average. Both will be in the 1415 area early next week:

What effect will it have that QE3 is open ended rather than having a set end date like QE1 and QE2? It’s too early to say, though the Fed scores at least some points for noticing that the ends of both were the triggers for large declines on equities after they ended. We’ll see whether they can avoid the same happening in 2013.

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