The Fed announced that QE is officially over.
This is a MAJOR concern for stocks. The markets are currently holding up because it’s the end of the month.
Let me explain…
Unlike individual investors who don’t have to report returns until year-end, most investment funds have to report their performances for each month.
For this reason, it’s very common for stocks to rally into month end as institutions buy stocks to force the markets higher. Doing this allows them to record month end returns at the best possible levels.
The simplest term for this is “performance gaming.”
With October having been a terrible month for most investors courtesy of the 9% drop in stocks earlier, institutions are highly incentivized to push the markets higher today, despite the fact that QE has ended.
At the end of the day, the single biggest driver of stock prices has been QE. Every time QE ended, stocks have tanked. So a new QE program is not coming anytime soon.
This is a major problem for stocks. The Fed has “saved” stocks every time in the last four years with a new QE program. It won’t be this time.
In 2010, the S&P 500 staged a death cross, where its 50-DMA broke below its 126-DMA (the half year moving average). Stocks were in a perilous state with the 2008 Crash still in everyone’s short-term memory.
The Fed stepped in, hinting at, then all but promising, and then finally launching QE 2 in July, August, and then November, respectively.
This set off a rally in stocks that lasted until the EU Crisis erupted in full force in 2011. Once again stocks staged a death cross. And once again, the Fed stepped in with promises of action followed by the announcement of Operation Twist in September 2011. Stocks took off and we were back to the races.
Which brings us to 2012. Europe was really going down in flames. Greece, then Portugal, and even Spain were lining up for bailouts. And the bailouts were getting larger by the month with Spain requesting €100 billion in June 2012.
ECB President Mario Draghi promised to do “whatever it takes” to hold the EU together. But the carnage was spilling over even into US markets. So Bernanke’s Fed promised yet another QE program, though this new program would be “open-ended” in June.
Sure enough, Bernanke unveiled QE 3 in September 2012. He then upped the ante, unveiling QE 4 in November 2012.
Stocks took off again, launching one of the sharpest, strongest rallies in history.
Which brings us to today.
The Fed has ended QE. And it won’t be launching a new program anytime soon. So when this rally ends and stocks collapse, the Fed won’t be coming to the rescue.
Be prepared.
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