One of the big inputs in the US stock market rally since the nadir in March 2009 has been the expansion of the US Federal Reserve’s balance sheet under its bond buying program known as quantitative easing (QE).
There have been three tranches of bond buying and each has buoyed the market while the Fed was buying bonds and expanding its balance sheet. But at the end of quantitative easing, QE 1 and QE 2, when the Fed was no longer buying bonds, stocks swooned.
So as we enter October, and with stocks in the US under pressure, the reality of an end to the Fed’s quantitative easing bond buying program this month looms large on the markets radar. Traders know that at both previous occasions stocks fell and are likely worrying about the same thing happening now in 2014.
What is worrying is that as traders act on their natural instinct to sell stocks before everyone else does, the S&P 500 is now at a very important juncture on the trend line of the QE 3 stock market rally.
A break would signal that, just like the end to QE 1 and QE 2, a pull back in stocks both in the US and around the world is going to accelerate.
It’s been too long since a 10% correction and many traders believe one is now due.