Over the course of the last several months, I have outlined in considerable detail my case against U.S. equities, European equities, the dollar, and the euro. In my estimation, there is every reason to believe that by reinflating the credit bubble and artificially inflating the prices of certain assets, the Fed is encouraging malinvestment, discouraging deleveraging, and imperiling both the system and its own balance sheet. In my opinion, when you do not allow a period of deleveraging to run its course naturally, you virtually ensure that the next crisis will be even more spectacular than the last.
That said, it is possible to agree wholly or in part with my analysis and still insist that no matter the long-term consequences, one would be foolish not to participate in the rally occasioned by the Fed's actions. The profit is, as they say, agnostic -- one can maintain a long-term bearish outlook and a healthy skepticism towards ultra-accommodative monetary policy, but still profit from the near-term rally.
In the interest of entertaining this idea, it is worth looking at the equity returns in and around previous rounds of quantitative easing to determine how long the average rally lasts and what the average gain tends to be before the market reverses course. After all, if you are going to play the Fed-stimulus rally, you should at least know how it has played out in the past so as to make as informed a decision as possible regarding the proper time to take profits.
Consider the following two graphics from a Credit Suisse note entitled "What The Fed's Policy Means For Markets" (they are quite bullish by the way):
Source: Thompson Reuters, Credit Suisse
Although the standard disclaimer applies (and I would note, applies even more so than usual given the diminishing nature of the economic returns produced by central bank stimulus) regarding past performance not being necessarily indicative of future results, anyone looking to ride the QE train can expect a 10-15% upside in the S&P 500 over the next six weeks. The data presented above also show what has happened in the past following the conclusion of QE -- the market begins to sell-off at around day 20.
Two things to note here. First, notice how much steeper the sell-off was after the conclusion of QE2 as opposed to QE1. Again, this is typical of a market that has become addicted to stimulus. The initial high is roughly the same but it wears off faster and the come down is worse.
Second -- and this I feel is the important point -- there is no set 'end' to QE3. It is theoretically unlimited. It will end eventually (we can only hope) but it seems it will not be as predictable and therefore it is difficult to say if subsequent retracements will be in any way similar. Again, the past isn't always a good predictor of the future.
In any case, if you are going to chase the new money and the rally it may spark, you should at least know how long the euphoria has lasted in the past. This way you can say you made the most informed decision possible given the available data. If you believe in the power of QE3, the past indicates you should play for a 10-15% rally in equities before considering taking profits. Furthermore, if QE3 does end and you find yourself still overweight U.S. equities, past results indicate you should pare down your holdings by day 20. Food for thought from an angry bear.