Front Running QE3

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Includes: GLD, JJC, JJG, SPY
by: Tim Shaw

The market is running on the hopes of QE3 being released by The Fed. Let's have a look at five asset classes in the hopes of gaining some perspective into movements of those markets. I want to look at the prior QE1 and QE2 time periods and see how the markets reacted prior and after the announcement. The five asset class ETFs are S&P 500 (NYSEARCA:SPY), Copper (NYSEARCA:JJC), Soft Commodities (NYSEARCA:JJG) ETN, and I am including oil ($WTIC) as the fourth and Gold (NYSEARCA:GLD) as number five. From here we can make an argument whether QE3 will even be a consideration and if so, what can we expect from the markets based on two prior QE releases.

QE1 YTD Prior During QE1
SPY -41% +52%
$WTIC -47% @45 +68%
JJC -45% +113%
JJG -35% -9%
GLD -2% +38%
QE2 YTD Prior During QE2
SPY +9% +12%
$WTIC +7% @85 +12%
JJC +11% +10%
JJG +19% -5%
GLD +23% +10%
Click to enlarge

Here is a chart of the five asset classes year to date in 2008 prior to the QE1 announcement. Click to enlarge

From the above chart. It is easy to see why QE1 was released, as all five asset classes were down significantly for the year in a deflationary setting, with oil at 45 / barrel. QE2 was released as all five asset classes were in positive territory for the year, and oil at 85 / barrel. Double digit gains were seen across all except the soft commodity ETN JJG, which saw a -5% fall during QE2.

So from QE1 (during) to QE2 (during), the effect was somewhat muted, mainly because all five were already in positive territory year-to-date heading into the QE2 announcement.

Let's look at the present state of the five asset classes to see how they fare year-to-date below.

QE3 ? YTD Current During QE3
SPY +9.78% ?
$WTIC -7.38% @91 ?
JJC -.70% ?
JJG +43.97% ?
GLD +1.11% ?
Click to enlarge

Here is a 2012 year-to-date chart of the five asset classes.

Click to enlarge

Notice, that from the chart above JJG, the ETN that tracks soy beans, corn and wheat, has recently made a parabolic move higher and is up 43% for the year. This is just the action that The Fed does not want to see with a potential QE3 announcement. Oil at 91.00 / barrel does not bode well for QE3 either.

Bottom Line: Front running a QE3 announcement can be a risky bet. QE1 made perfect sense, as all asset classes measured were in a deflationary spiral. QE2 did have the effect of raising asset prices double digit after the announcement, but it was overall a muted response. The potential for QE3 to be announced anytime soon looks rather slim, based on food commodities soaring, and oil at 91.00 a barrel. High food commodities are likely to set off another bout of rioting in the Middle East and emerging markets. I do not believe The Fed would want that heading into an election year. We would have to see a market correction to the tune of 10-15%, with soft commodities and oil selling off, before I would expect any QE3 announcement. Portfolios are presently 100% cash.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.