Yellen's Easy Money Further Inflates The Bubble

TheStreet.com

NEW YORK (TheStreet) -- Janet Yellen told Congress this week that if she becomes the next chief of the Federal Reserve, the ridiculous policy of a 0% to 0.5% federal funds rate that began in December 2008 will continue for the foreseeable future.

It also appears that quantitative easing will continue without tapering until the next meeting of the Federal Open Market Committee in late-January. As a result, the equity bubble continues to inflate. The Standard & Poor Index, the U.S. benchmark, has gained 26% in 2013, poised for its best year since 1997.

Quantitative easing was supposed to bring down long-term interest rates, not inflate equity bubbles. Look at the yields on the benchmark Treasury 10-year note and the Treasury 30-year bond.

The Federal Reserve began QE3 and QE4 in September and December 2012, and the 10-year yield was at 1.548% at the close in August 2012 with the 30-year bond yield at 2.668%. These yields reached multiyear highs at 3.007% and 3.94% on Sept. 6 and Aug. 22 this year.

Our potential future Fed chairwoman testified that interest rates were lower since these QEs began. Well, that's just not true.

We know that the Fed-induced bubbles for gold and crude oil popped in September 2011 and July 2008. We know a bubble in equities popped in October 2007. When stocks formed a quick V-shaped bottom in March 2009, I remember at least one headline that read "Dow 5000."

When a bubble is inflating, you don't know when it's going to pop. Back in March 2000 with the Nasdaq above 5100, most strategists remained bullish on technology stocks. Today most strategists say that the stock market remains cheap and will continue to move higher.

ValuEngine shows that 85% of all stocks are overvalued with 54.1% overvalued by 20% or more. What's keeping the stock market bubble inflating is strong technical momentum as Wall Street speculates using cheap money pumped in by the Fed, which it will continue to do so under Yellen.

Today's market pulse shows that the Dow Industrial Average, S&P 500 and Dow Transports set all-time highs or multiyear high for the Nasdaq yesterday. Additional new highs are obviously possible, but the upside to my risky levels is only 0.6% on Dow Transports.

Dow Industrials has risky levels 1.8% and 3.9% higher. The S&P 500 risky levels are 0.7% and 3.6% higher. The Nasdaq risky levels are 1.0% and 1.3% higher. The Russell 2000 has upside to risky levels that are 2% and 4.7% higher. The downside risk when the bubbles pop range between 20% and 29.4%.

On Wednesday, I profiled 11 popular exchange-traded funds, and today I update my buy-and-trade parameters for bonds, gold, crude oil and equities, which were previously presented on Oct. 2.

iShares 20+ Year Treasury Bond ($104.52 vs. $105.80 on Oct.1) traded as low as $102.11 on Aug. 21 and as high as $108.73 on Oct. 23. This Treasury ETF has been trading back and forth around its 50-day simple-moving average at $105.23 since Sept. 23.

The weekly chart is negative with the five-week modified-moving average at $105.53 and the 200-week SMA at $108.34, which was tested at the Oct. 23 high. My semiannual value level lags at $92.32 with this week's risky level at $107.77.

SPDR Gold Trust ($124.27 vs. $124.59 on Oct. 1) has been trading back and forth around its 50-day SMA at $127.46 since July 22 with a high of $136.94 on Aug. 27 and a low of $121.73 on Nov. 12. The weekly chart is negative with the five-week MMA at $126.65. My monthly value level is $112.95, with my quarterly risky level at $138.20.

Energy Select Sector SPDR Fund ($87.18 vs. $83.44 on Oct.1) has been above its 50-day SMA at $84.94 since Oct. 10. The weekly chart is positive but overbought with the five-week MMA at $85.58. The weekly chart for crude oil is negative but oversold, a sign that the equities bubbles include energy stocks. My semiannual value level is $81.91, with a monthly pivot at $85.96 and semiannual and annual risky levels at $88.35 and $91.08.

SPDR Dow Jones Industrial Avg ETF Fund ($158.69 vs. $151.62 on Oct. 1) is setting all-time highs this week as it appears that Yellen will become Fed chairwoman. Diamonds tested its 200-day SMA at $146.96 on Oct. 9 and has been above its 50-day SMA at $153.69 since Oct. 16. The weekly chart is positive but overbought, with the five-week MMA at $155.14. My weekly value level is $154.82, with monthly, semiannual and quarterly risky levels at $161.47, $164.06 and $167.20.

PowerShares QQQ Trust Series 1 ($83.80 vs. $79.68 on Oct. 1) is setting multiyear highs this week and has been above its 50-day SMA since Oct. 10. The weekly chart is positive but overbought with the five-week MMA at $81.32. My semiannual value levels are $80.87 and $79.76 with monthly and quarterly risky levels at $84.01 and $85.11.

SPDR S&P 500 ETF Trust ($179.23 vs. $169.34 on Oct. 1) is setting all-time highs this week and has been above its 50-day SMA since Oct. 10. The weekly chart is positive but overbought with the five-week MMA at $174.28. My semiannual value levels are $174.10 and $160.60 with a weekly pivot at $177.19 and monthly and quarterly risky levels at $180.12 and $185.04.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (1)