How Much of the Market is the Fed and How Much is Real?

Mike Turner |

First of all, before I get to the question of how much of the market is real and how much of it is purely due to a Fed-induced artificial market, one has to deal with the issue of: Is 


of the current bull market due, in part or in whole, to the loose money policies of the US (and other global central banks) Federal Reserve?

I suppose there are those out there that believe the market is purely a function of the present worth of the future (six months from now) economy. And, the term, "economy", is all inclusive... including a mind-altering free-money Federal Reserve. Then, there are others (certainly not you, dear reader), who don't even think about such things... they mindlessly get into and out of the market purely on the advice of their broker or golfing partner.

Quote worth Quoting Again

"The very word "secrecy" is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings. We decided long ago that the dangers of excessive and unwarranted concealment of pertinent facts far outweighed the dangers which are cited to justify it. …there is little value in insuring the survival of our nation if our traditions do not survive with it. And there is very grave danger that an announced need for increased security will be seized upon by those anxious to expand its meaning to the very limits of official censorship and concealment."

...John F. Kennedy

There is another group... sometimes I think this is the group that gets picked to proffer their opinions on TV all the time... that actually believes the market is a true reflection of a strengthening and growing economy. Last week's market action must be mighty hard for these good folk to rationalize...

The easiest way to answer the question about how much the market is artificial and how much is real, is to simply estimate what would happen one month following a complete elimination of any quantitative easing and interest rate manipulation by the FED. Should the FED suddenly step out of its dumping of trillions of Dollars into liquidity and interest rate controls, I would expect the market to plummet at least 30%... maybe more. But, after the initial collapse, the market would begin to get back on its feet and move into a longer-term assessment of the true present value of future earnings... the real way the market should be functioning.

But... what if I am wrong... instead of just 30%, maybe the FED has the market overpriced by 40%... or 50%... Could that be possible? On the other hand, maybe the FED plays a very minor role in the current value of the market. I'm not sure anyone believes that, but I suppose it is possible.

My guess... and it is only a guess... is the market is at least 30% over valued. If you assume that a strong market will move up about 8% per year and the start of the FED intervention was back in 2009, then the market 'should' be up about 41% from its 2009 low of 6,627 (on the DJIA). That would put the market at about 9,377, for a 42% gain in about four and a half years. That would be a very strong market.

But, the market is up 123% in four and a half years; even after last week's sell-off. The market is up 3 times more than its 'normal' bullish, long-term trend.

Now... keep in mind that in the past 4.5 years, the economy has slowed down substantially from what is normally termed a strong economy that would support a strongly bullish market. Unemployment is more than twice the rate seen in strong economies. If we weren't looking at a 123% gain in the market over the past 4.5 years, no one would believe that such a market could occur in such a weak economic environment.

Certainly, one could draw the conclusion that the economy has not supported a 123% raging bull market for the past 4.5 years. So, if the economy is not supporting the market, then what else could it be other than the never-before-seen monetary policies of the FED?

If "normal" bull-market growth is 42% over a 4.5 year period, then let's just assume that there is some kind of "new normal" that has redefined bull-market growth rates and double that rate. Let's assume that the market should, in very weak economic times, grow at an annual rate of about 16%; as completely irrational as that assumption might be. That would put the DJIA at about 12,959... 14% lower than it is today.

I don’t know about you, but I just can’t bring myself to believe the economy has been growing at a rate that would support a stock market averaging 16% per year for the past 4.5 years. 


other than the cost of earnings (how share prices are actually represented) is driving the market higher. My assumption is it is the US Federal Reserve. And, I seriously doubt that the FED’s impact on the market is only 14%. I suspect it is far closer to 30% or more... maybe much more.

If my assumptions are right... or even within orders of magnitude right... what should we be doing?

As I have said on many occasions, I believe the FED is far more politically motivated than they would admit. I further believe that the FED has painted itself into a financial corner that it cannot easily escape without plunging the market and our fragile economy into a massive economic collapse. The FED is trying to ‘test-the-waters’ by mentioning they might ‘taper’ their crack cocaine of loose money, more to see how the markets will react than anything else. They know they cannot stop the printing presses because so much of the current economy/market is in a FED-induced bubble that depends on that unending supply of liquidity.

And... I haven’t even mentioned what happens to bonds when the FED stops its price-controlling interest rate policy of zero interest. Trillions of dollars will be lost and massive moves of money from bonds to stocks will ensue. But, if the stock market is also collapsing under the weight of no more free money, what alternative will big/small investors have?

The good news... such as it is... is I do not believe the above scenarios will unfold this week or this month. My goal for my money and my clients’ money is to be a long-term investor, one week at a time. This is why, every


, I determine how much of my money and my clients’ money should be in inverse ETFs and how much should be in long positions. My suggestion is you need to have a long/short strategy at least somewhat similar to my Sabinal One portfolio strategy. You need, in my opinion, to always have a plan for the day the bubble begins to burst.

As for that bubble bursting this year... I doubt it. I think the FED is way too politically motivated to keep the money flowing. Bernanke may not be, but since the President has signaled that this is the last year for Bernanke, I am just cynical enough to believe he (the President) will put someone in charge of the FED that will keep this bubble building through the 2014 election cycle. After the mid-term elections and assuming the Dems take back control of the House, then the bubble can burst and the President will have another crises that will not go to waste. I hope I am completely wrong, but this strategy would not surprise me.

The Bull/Bear and Turner Oscillator Report...


Beware of a potential crash in bonds if interest rates actually begin to climb... doubtful as that possibility may be in the near (two weeks) term.

Turner Bull/Bear Forecast
For the Upcoming Week

Investor Sentiment Weekly Forecast

The Turner Bull/Bear Forecast™ provides a one-week directional forecast on the market, with [-5] being the most Bearish and a [+5] being the most Bullish. This is predicated on the ratio of number of new Buy Signals to the number of new Short Sell Signals for the previous week. The assumption is investors are becoming more Bullish the more lopsided the ratio becomes in favor of new Buy Signals; and, the converse is true; the more lopsided the ratio becomes in favor of new Short Sell Signals, the more Bearish investor sentiment.

Turner CrossOver Oscillator

The Turner CrossOver Oscillator™ provides an indication of the over-bought or over-sold condition of the market. The red line (New Short Sell Signals) shows a technical direction and strength (or lack thereof) of investors to push stock prices lower, triggering new Short Sell Signals. The higher the Short Sell Signals line, the more Bearish the market. The black line (Composite of both Short Sell and Long Buy Signals) is the combined impact of both the new Short Sell Signals and the new Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite of Signals line is moving higher. The higher this line moves, the more Bullish the market. Market bottoms are represented by a change in direction of the Composite of Signals line from moving lower to moving higher. Market corrections become much more likely when the Composite of Signals line crosses the Short Sell Signals line from below the Short Sell Signals line to above the Short Sell Signals line. The market is represented by the green shaded area.

Closing Thoughts...

  1. This

     coming Thursday

    , the CBOE has asked me to conduct an all-day webinar for CBOE subscribers. This will be a great collaborative session where I will have several hours of live training and explanation of how to pick the best stocks for options trading. The CBOE staff will be providing live training on how to make the best and smartest options trades in any market. This joint CycleProphet/CBOE, day-long webinar is a unique opportunity for attendees to expand their knowledge and trading acumen. Go

    for details.


Congratulations to the handful of subscribers who found our new feature on the CycleProphet website. We are doing a 'soft launch' of our "Live Chat" on our website. You can find it at the bottom of every page, but you have to scroll all the way to the bottom. If you are using our tools and have a quick question; and, if the Live Chat is "Online"... then, merely type your question and one of the CycleProphet staff will promptly respond. We hope this provides you with a more timely and responsive level of assistance.

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Symbol Name Price Change % Volume
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