 Hey everyone, this is Dan with another episode of my videos about Fed monetary policy and how that will impact our stock portfolios. S&P 500 reached its all-time high on January 3rd. Since then, it has dropped 9%. The Federal Reserve Bank or the Fed recently announced that they would start QE tapering and they will be raising interest rates in order to fight inflation. On the Fed data I analyzed today, I see that the Fed has already started tapering. The million dollar question is how much the Fed will stick to the aggressive tapering schedule outlined in the January FOMC statement and how much will that affect the stock market? Will S&P drop more than 10%? How about dropping 20% or more? What should we do with our investments? Let's get into the details. First, what is quantitative easing? According to Investopedia.com, quantitative easing or QE is a form of unconventional monetary policy in which a central bank such as the Fed purchases long-term securities from the open market like treasury notes and treasury bills and mortgage-backed securities so that they can increase the money supply and encourage lending and investments. By increasing the money supply in the market, the Fed will also cause stocks such as S&P 500 to go up. And the flip side of it is that if the Fed is reducing quantitative easing or tapering, then the stock prices will tend to go down. The question is how much would it go down now that the Fed is starting to do tapering? If you look at the FOMC statement published on January 26, there are a few keywords. The FOMC decided that the inflation rate was well above 2%, actually it was running at 7% of the time. Now it's at 7.5% year-to-year and because of a strong labor market that they will start reducing the monthly pace of its net asset purchases. And they are aiming for $20 billion a month of purchase of treasury securities and $10 billion a month of purchase of mortgage-backed securities. If you add up these two numbers, that's $30 billion and that's the target of the FOMC of how much they want to increase Fed assets per month. That's still a big number, but compared to six months ago, they were increasing the Fed assets at the rate of $120 billion a month. So $30 billion a month is actually a pretty significant reduction. Because the Fed FOMC members are so concerned about the CPI, let's talk about the CPI. This is the chart published by the Federal Reserve Banks. As you can see, the CPI has been hovering around 2.5% since 1985, but in the last year or so, it went up quickly. Actually, at this point, it's about 7 to 7.5%. If you look back in history, the last time when CPI was this high was more than 40 years ago, around 1982. Now if you look at the total Fed assets, as you can see, it's been increasing steadily ever since the beginning of 2020, the pandemic, and most recently it's been increasing at the rate of $120 billion a month. Now to look at the rate of increase of the Fed assets, I plotted the difference between each week's Fed asset and the number four weeks prior, which is basically the monthly change of the Fed assets. Of course, the numbers have been going up and down, but if you plot a trend line, you can see that it started out at about $130 billion a month of increase back in March of 2021, and it's been declining gradually. And currently, according to the trend line, it's at about $80 billion a month of increase in total Fed assets. And the most current week, it's at $43.2 billion. Now that compares to the FOMC target of $30 billion. We're not quite there yet, but you can see that the Fed definitely has been aggressively trying to approach that target. And what's the impact of this on the stock market? Let's look at this chart. Here's the same plot about the Fed asset, four week delta, the trend line, just like the last page, and the blue line here is SPY, reflecting the movement of S&P 500. There are a few notable points here. For example, when the S&P dipped around May 12th of 2021, the Fed asset jumped up, adding liquidity to the market. And sure enough, S&P started to go back up again. And then again, we hit another S&P dip around here, that Fed asset went up. Actually, it's a rate of increase of Fed asset went up. Then S&P got better. Again, another dip. And then soon after that, Fed asset went up. But in the last month or so, this type of interaction between Fed asset and S&P stopped. We had a pretty significant dip of the SPY, more than 10%, more like 11%, around January 27th. The Fed asset rate of increase was relatively low compared to the historical value. And they are definitely trying to approach that target of just $30 billion of increase per month. And apparently at this point, they were not reaching the target yet. And then as of February, the Fed asset rate of increase continued to go down. In the meanwhile, S&P is 9% from its all-time high as of today. The green line is at $43.2 billion of monthly increase, which is not quite at the $30 billion target yet. And looks like the Fed is aggressively trying to reach the target of $30 billion a month of increase. And then after that, it will soon go to zero monthly increase starting in March. If you look at what already happened with S&P, I would say if the Fed continued at that pace, there's a likelihood that S&P will go down even further, probably to 21% drop from the all-time high. What did I get that 21% number? I will explain that. That actually came from around 1982. If you like what you've seen so far, I'd like to encourage you to click the like, subscribe and notification button. That'll enable you to receive notification when I publish my next video. It'll also encourage me to publish more videos like this in the future. Of course, what's causing the market to go down recently is not just the Fed monetary policy, but also because of what's happening in Ukraine. You probably heard about that already, so I'm not going to go into details, but this is definitely a major factor affecting the market. If you look a little bit closer into what the Fed has been thinking, we can look at the FOMC meeting minutes that were just published today. The FOMC meeting was held in January of 2022. They actually mentioned S&P 503 times in the 20 pages of minutes. They said the S&P index declined about 5% already. That was alarming to them. And then they also mentioned that the VIX increased considerably. And they mentioned that the financial system in the US is quite vulnerable because of the high PE ratio. And definitely they are mindful of the stock market. And I believe that they will try to avoid a major stock market crash while they are trying to control inflation by doing QE tapering and increasing interest rates. The question is how far would the Fed allow the stock market to drop before they ease up on their actions? To answer that question, I actually looked into the actions of the Federal Reserve banks back in the time between 1978 and 1984. That was a video that I posted recently about this analysis. And you can find this in my YouTube channel. From that analysis, I'd explain how the Fed was juggling between trying to increase the Fed funds rate to control inflation and sometimes ease up on their tightening process because the stock market was dropping or the unemployment rate was getting too high. Eventually S&P 500 dropped by 21% and the unemployment rate shot up from 4% or 5% to 11% before inflation was brought under control. That's where I got a 21% number for the potential drop in the stock market. Would it be the same this time around? Nobody can tell. But at least we can look at what happened historically and be ready in case it does happen. So what are my strategies? First, I've sold already some of my long positions to locking profits or to cut losses. For example, I sold BNTX, MRNA, Moderna, ASML, AMD, NVIDIA, RCL, TQQQ and I still keep some of the shares. And I've been trading SQQQ and inverse ETF to hedge against downturns. And I've been monitoring SPY in terms of daily 150 and 200 exponential moving averages and weekly 50 period exponential moving average and other key support resistance levels. And I've also been monitoring QQQ. Now definitely continue to monitor the situation in Ukraine. And I'll sell more long positions if critical support levels are breached and I'll continue to monitor Fed actions, Google trends. I explained that in my video that I mentioned in the last page. You might want to look into that. And I've been monitoring RSI, DMI and MACD, the technical indicators. And I'll keep the stocks with good fundamentals. For example, Google, ASML, AMD, and I bought TMV recently, which is not a stock but an ETF that's pegged to the movement of the yield of the 20-year Treasury bill. And I've been keeping shares of recovery stocks and energy stocks, including Royal Caribbean, Southwest Airlines, ConocoPhillips, and the oil ETF, UCO. I will continue to update my Twitter subscribers almost on a daily basis about the latest news events and also some of my trades. At this point, I'd like to encourage you to subscribe to my Twitter account, which is DanMarketL, in addition to subscribing to my YouTube video. For example, on February 11th, I tweeted that I bought SQQQ again. And three days later, I said I sold my SQQQQ at average 1.5% gain and I bought more TMV shares. Again, I'd like to remind you to click the like, subscribe, and notification button. As usual, I would very much welcome your comments, questions, and suggestions. At this point, I'd like to remind you that I'm not a financial advisor. I share my stock trading strategies and analyses for entertainment and educational purposes only. If you want to buy or sell stocks, you should definitely make your own decisions and you should consult with the financial advisors before you do so. This about wraps up my video for now. I will chat with you again in the next few days. In the meanwhile, I'd like to wish you the very best of luck with your financial investments. But also because of...