Did Yesterday’s Open-Ended QE Announcement by the Fed Usher in a New Reflationary Wave?

The chart below shows the SPX on a weekly basis.

Line (1) represents what we believe to be the market/economy’s most important line in the sand since 1987 – an on/off switch if you will.

Why?

This line is where the crash of 1987 began at (A), where the Fed’s tightening regime of 1993/1994 held the market in check at (B), where the greatest phase of the tech stock bubble began at (C) when we broke the line in 1995, where the market bottomed at (D) in 2002 to begin the housing/basic material bubble, where depressionary/deflationary fears were stoked when we broke below during the panic at (E) in 2008 and where the market was held in check at (F) in 2011 as we began a brief Euro-driven bout of deflationary fears.

Now, with the market’s material rally yesterday on the back of the Fed’s open-ended QE announcement, the SPX appears to have broken back above line (1) at (G) after being turned away again this past spring.

If this break-out holds, which was not the case in 2011 when we temporarily broke above the line, we are inclined to believe that a new inflationary/reflationary wave has begun with the effects similar to that which occurred at (C) in 1995 with tech stocks and at (D) in 2002 with housing and basic materials stocks.

This time around, given the implications of open-ended QE, we are inclined to believe the market’s preferred go-to vehicles to exploit this potential reflationary sentiment will be gold and their derivative miners (not that other risk assets in general won’t participate).

Like gold since 2002, tech stocks were already up materially over the past decade heading into 1995.  This did not stop them from enjoying much more (and some of their best) upside thereafter into 2000.

Only time will tell, but the set-up is compelling should the break-out hold.

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