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How Quantitative Easing Has Affected Buyers and Sellers.
6/7/2016
Introduction
The purpose of this report is to analyze the actual effects the Federal Reserve’s policies of Quantitative
Easing (QE) has had on the forces of supply and demand in the US equity market. It is important to
understand that this report does not draw any conclusions about the efficacy of Fed policy. Further, it
does not predict the impact central bank policies will have going forward. It is simply a review of the
actual effect the QE programs of the FED have had on the equity market’s supply and demand.
For those unfamiliar with Lowry Research, the Lowry analysis is not fundamental or economic analysis in
the traditional sense. Rather, Lowry studies the behavior of buyers and sellers; the analysis of supply
and demand, which is broadly recognized as the foundation of all economic analysis.
While fundamentals and economics play an important role in investment analysis, every major market
top or bottom has had different fundamental and economic reasons why the shift in trend occurred.
Therefore, Lowry has avoided seeking the ever elusive reason why, and has simply reported the
measures of investor supply and demand since 1938.
How does Lowry measure the market’s Supply and Demand?
The founder of Lowry Research, L.M. Lowry, set out to track the market by supply and demand because
the 1929 market crash gave few hints that a crash was imminent. He understood that tracking the
market by simply the prices of popular price indexes (i.e. DJIA, S&P 500) was very inaccurate and
deceiving. This is because most indexes are composed of stocks with similar characteristics such as
capitalization and are commonly weighted by either price or market cap. Therefore, an investor who is
measuring the entire equity market’s performance by these indexes is only taking into account a small
portion of what is actually listed on the major exchanges. Hence, strength in the price indexes does not
mean that the entire market is also strong.
This recognition led to the idea of compiling upside and downside volume and cumulative points gained
and point lost price changes statistics. He would sum the number of stocks advancing, record their
volume and points traded. He then separated the decliners, their volume and points lost. The result was
a measurement of the total demand level for stocks that day, by both activity and intensity. He did the
same for the declining issues, down volume and down points and he began to track their trends. This
was the birth of the Buying Power (Demand) and Selling Pressure (Supply) Index. These indicators,
which has been backdated through the mid-1920s have shown the forces of Supply and Demand at work
and continues to provide a tangible means to evaluate the underlying condition of the market. Below
are recent examples of the Buying Power/Selling Pressure indexes in various times and markets.
The Following table summarizes the multiple QE programs since 2008.
Fed's Easing Timeline
Between QE Programs
Demand Supply
QE1 BP SP QE1 From Hint Demand Supply QE1 From Start to Finish Demand Supply
Started 11/25/2008 140 903
Expanded 3/18/2009 129 879 Start to Expanded -8% -3%
Ended 3/2/2010 175 699 Start to End 25% -23% 25% -23%
QE2 b/w 68% -17% QE2 From Hint Demand Supply QE2 From Start to Finish Demand Supply
Hint at QE2, Jackson Hole
8/27/2010 294 580
Started 11/3/2010 358 466 Started 22% -20%
Ended 6/30/2011 404 310 Ended 37% -47% 13% -33%
Operation Twist -16% 29% Operation Twist Demand Supply Operation Twist Demand Supply
Started 9/21/2011 338 400
Extended 6/20/2012 223 401 Extended -34% 0%
Ended 12/31/2012 226 326 Ended -33% -19% -33% -19%
QE3 -14% 15% QE3 From Hint Demand Supply QE3 From Start to Finish Demand Supply
Hint at QE3, Jackson Hole
8/29/2012 195 375
Started 9/13/2012 252 193 Started 29% -49%
Taper Tantrum 5/22/2013 268 232 Taper Tantrum 37% -38%
Tapered 12/18/2013 256 190 Tapered 31% -49%
Ended 10/2/2014 219 198 Ended 12% -47% -13% 3%
-27% 28%
Current 4/15/2016 160 253 Ex Twist -52% 21%
AVGs 3% 14% 10% -34% -2% -18%
AVGs ex-twist
-27% 28% 15% -24% 8% -18%
QE1
The chart and table below illustrate the positive effect QE1 had on the market’s balance of Supply and
Demand. Enacted prior to the final lows of the 2007-2009 bear market, the program had the most
bullish affect after it was expanded in the spring of 2009.
-0.3 -0.2 -0.1 0 0.1 0.2 0.3
Start to Expanded
Start to End
Start to Expanded Start to End
Supply -3% -23%
Demand -8% 25%
QE1 Effects on Equity Market's Supply/Demand.
Between QE1 and QE2
The period between QE1 and the hint of QE2 was the only period without FED intervention that
experienced a positive balance of the Supply/Demand balance. However, without direct intervention the
market experienced a 5 month period of high market volatility, which was in stark contrast to the lower
volatile uptrend the market produced during most of QE1.
QE2
The tables and charts below demonstrate that a large portion of the gains in both Supply and Demand,
especially Demand during QE2, were produced not from the start of the program but from the hint at
the program. Nonetheless, the program did support a bullish influence on the markets Supply/Demand
balance. Comparing QE2 to QE1, supply fell by a larger percentage but demand only increased by half.
-0.6 -0.4 -0.2 0 0.2 0.4 0.6
Started
Ended
Started Ended
Supply -20% -47%
Demand 22% 37%
QE2 Effects on Equity Market's Supply/Demand. (From Hint)
-0.4 -0.3 -0.2 -0.1 0 0.1 0.2
Supply -33%
Demand 13%
QE2 Effects on Equity Market's Supply/Demand (start to finish)
Operation Twist
Operation twist clearly led to a drop in the market’s supply, but only after it was extended. However, the
demand effect on the market was bearish throughout the entire program. This was in stark contrast to
the first two QE programs of the FED, where both produced a bullish effect on the market’s
Supply/Demand balance. After closer review of the details of this program, it is logical to assume that
these results may have occurred because Operation Twist did not expand the monetary base because
the long-term asset purchases were funded by short-term asset sales rather than money creation (QE).
Between QE2 and QE3
The period between QE2 and the hint of QE3 not only mimicked the period between QE1 and QE2 with
period of extended market volatility, but immediately fashioned a bearish drop in demand and an
increase in supply.
-0.4 -0.35 -0.3 -0.25 -0.2 -0.15 -0.1 -0.05 0 0.05
Extended
Ended
Extended Ended
Supply 0% -19%
Demand -34% -33%
Operation Twist's Effect on Equity Market's Supply/Demand.
QE3
From the table below, the equity market’s Supply/Demand was most affected bullishly between the
initial hint at the program and the actual start of it. In May of 2013, after a mere suggestion of an
imminent reduction in bond purchases by then Federal Reserve Chairman Ben Bernanke, panic spread in
bond markets all over the world. This “mention” which has been labeled the “Taper Tantrum” had a
strong but short-lived bearish effect on the market’s S/D. Following the tantrum the FED then began to
taper their easing in December of 2013, which had an immediate negative effect on demand throughout
the rest of the program.
Evaluating just the time that QE3 was enacted and finished, the program actually produced a drop in
demand and an increase in supply, a notable difference from the first two easing programs.
-0.6 -0.4 -0.2 0 0.2 0.4 0.6
Started Taper Tantrum
Tappered Ended
Started Taper
Tantrum Tappered Ended
Supply -49% -38% -49% -47%
Demand 29% 37% 31% 12%
QE3 Effect on Equity Market's Supply Demand. (From Hint)
-0.15 -0.1 -0.05 0 0.05
Supply 3%
Demand -13%
QE3 Effects on equity Market's Supply/Demand (start to finish)
Between QE3 and Current (4/15/16)
(In Depth analysis of the current environment from the end of QE3, is reserved only for current Lowry
Clients)
QE Program Comparisons
Between QE Comparisons
Conclusions
Taking into account simply investor supply and demand during and between the FED’s QE actions a few
very clear conclusions can be made….
-Each successive QE plan shows a clear example of diminishing returns, in terms of demand. As
each QE program showed a lower increase in Buying Power, with the last program (QE3) actually
posting a drop in demand. The trends were not as successive in supply because during QE2,
supply decreased the most. But supply mimicked demand during QE3 where it actually grew.
The only exception in comparison to the diminishing returns of the QE programs was during
Operation Twist where both Supply and Demand fell. However, after reviewing the details of
this program it is logical to assume that these results may have occurred because Operation
Twist did not expand the monetary base because the long-term asset purchases were funded by
short-term asset sales rather than money creation.
-Increases in demand and decreases in supply were greatest not from the beginnings of each
program, but from the moment that it was hinted the program was being considered.
-Confirming the diminishing ability of the QE programs to increase demand and decrease supply,
in each successive period between QE there was a notable weakening of the supply demand
balance, relatively. As the only period without QE to produce a positive relationship of supply
and demand was between QE1 and QE2.
-Times of market volatility from the inception of the FED’s easing programs were most common
during the times without FED intervention.
-Even with multiple rounds of quantitative easing the signs of weakening demand and increasing
supply that occur during the maturing and topping process of major bull markets, that have
been well documented by Lowry, are still very much in place.
(To learn more about the nature of bull market tops and the major warning signs of bear markets, please
visit our website and download our free white papers.)
http://lowryresearch.com/white_papers.cfm
Forward
With rumors of a possible negative interest rate policy by the FED, the Buying Power/Selling Pressure
charts of select international markets that have already instituted a negative interest rate policy are
published below. The one conclusion that we draw from this, assuming no outside factors except the
origin of negative rates to the current vs. each markets measurement of Supply and Demand, is that
negative rates have not currently created a robust bullish increase in the balance of their market’s
supply and demand.
Authors: Christopher Georgopoulos and John Bonsell.
www.LowryResearch.com
Email: [email protected]
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