Will Selling Pressure Overpower ‘Operation Twist?’

The Fed last week unleashed a $400 billion package to boost the economy. To say
the market didnt react favorably would be an understatement. The Financial
Select Sector SPDR (NYSE: XLF ) greeted the program with an 8% haircut. The S&P,
Dow Jones and Nasdaq fell 4% to 6%. On the bright side, the yield of the 10-year
T-Note dropped another 0.242%, from one all-time low to the next. Will Operation
Twist eventually buoy stocks, or will the market overpower the Feds half-hearted
effort? Believe it or not, but after some more suffering, I believe the Fed
eventually will reap some (temporary) credit for this stick save. Bernanke Must
Be Surprised In his Feb. 9 speech before the U.S. House of Representatives, Ben
Bernanke was quick to take credit for the results of QE2: Since then (the onset
of QE2), equity prices have risen significantly, volatility in the equity market
has fallen. All of these developments are what one would expect to see when
monetary policy becomes more accommodative. On Feb. 9, the S&P closed at 1,320,
the VIX at 15.87. Today the S&P is 13% lower while the VIX has soared a stunning
160%. Bernankes credibility has tumbled somewhere between 13% and 160%. Contrary
to Bernankes upbeat outlook, the ETF Profit Strategy Newsletter published the
following chart just a week after Bernankes comfy cozy assessment of QE2 and the
stock markets reaction. The chart shows a giant bearish head-and-shoulders or M
pattern. At the time, the Newsletter projected a market top at 1,382-1,385. The
April 4 ETF Profit Strategy update refined the target range: In terms of
resistance levels, the 1,369-1,382 range is a strong candidate for a reversal of
potentially historic proportions. Sleep in the Bed You Made Operation Twist the
Feds latest concoction became necessary because QE2 didnt stick. Banks
graciously accepted the generous $600 billion donation, but despite the huge
cash infusion, the Banking Index today trades 22% below its Nov. 3, 2010 prices,
when QE2 was launched. Will Operation Twist be More Successful than QE2? QE2
created $600 billion out of thin air while Operation Twist merely changes the
maturities of the Feds existing balance sheet. During the next nine months, the
Fed will sell $400 billion worth of short-term (three years or less) Treasuries
and use the proceeds to buy maturities ranging from six to 30 years. Maturing
mortgage-backed securities will be reinvesting in MBS, not in Treasuries. If you
are wondering how this approach of transferring money from the left to the right
pant pockets makes a difference, youve already found the reason for the
post-FOMC-announcement meltdown. Wall Street considered the proposal
half-hearted and the stated goal of lowering long-term interests unnecessary,
especially considering the yield on the 10-Year T-Note already is at a
multi-decade low.