Eric Parnell shows how the market's recent moves mirror what happened after QE2 was announced. He speculates the Fed is using Operation Twist to provide liquidity to the stock market and push stocks higher. For the Fed to wait no more than 40 days after QE2 to begin Operation Twist and then to start an active dialog about QE3 no more than 3 weeks after Operation Twist began shows that the Fed doesn't have confidence in the economy or stock markets to stand on their own.

At the time Operation Twist was announced and everyone was saying that it was balance sheet neutral because the purchases of longer term Treasuries would equal sales of shorter term treasuries – Goldman released an article that said that Operation Twist was a form of QE3. It appears they may be right.

Eric says a key test of the Fed's ability to control the markets will be if the eurozone leaders deliver an inadequate policy solution on Wednesday and the stock market continues to barrel through to the upside instead of reacting severely to the downside. This would be a critically important confirmation that we have returned to a Fed driven stock market similar to QE1 from March 2009 and QE2 from late August 2010. If so, he believes this will call for increasing portfolio allocations to stocks. The fundamentals do not support it, but government stimulus driven markets can keep going up until inflation rises again threatening earnings and consumption.

If the market continues to run up despite an inadequate solution out of the EU Summit – our long term buy signals may be triggered as a result of the Fed "juicing" the markets. That may be why Pension Strategies was so confident there would be a melt up this fall.

Time will tell.

The Fed needs to stop intervening and allow interest rates to rise and the financial markets to purge themselves of excessive debt levels so that we can get back to earning decent returns without taking a lot of risk. Bernanke is trying to push conservative savers and investors into taking more risk because they can't earn anything from safe investments. If a financial crisis hits Europe because the EU political leaders don't get their act together in time, a lot of baby boomers who can't afford to lose any more money are going to get hurt.

http://seekingalpha.com/article/302007-a-stock-market-twisted-by-qe-expectations