There are a lot of different indicators and studies that technical analysts use, and all of those tools came into usage due to some degree of merit. But the one factor which seems to be trumping everything else lately is what the Fed is doing with its QEternity program, which shows no sign of stopping anytime soon, or maybe ever. 

This week’s chart compares the SP500 to the total assets held by the Fed. That plot is made up from the total of the Fed’s Treasury holdings and its mortgage backed securities (MBS), which are sometimes referred to as “agency” debt products. The agencies which that title refers to are Fannie Mae, Freddie Mac, etc. 

Putting the chart together this way helps us see just how important the Fed’s purchases have been to the task of sustaining the bull market for stocks. Whenever the Fed has decided to change the slope of the green line, the slope of the SP500 has also changed in a dramatic way. That makes it such an important question to contemplate a “tapering” off in the rate of growth of Fed assets, or even an outright end to quantitative easing (QE).

This chart also helps us see just how critical the Fed’s actions were in bringing about the awful bear market of 2007-09. Back then, the Fed just held Treasuries, and it did not start buying agency debt until January 2009. The Fed’s holdings of Treasury debt peaked in August 2007 at $790 billion, and over the next 17 months the Fed sold off more than $300 billion of those holdings. That’s right, in the middle of the worst liquidity crisis in decades, with banks folding and with Congress handing out tax rebates, the Fed was pulling liquidity OUT of the banking system. 

There are a lot of different indicators and studies that technical analysts use, and all of those tools came into usage due to some degree of merit. But the one factor which seems to be trumping everything else lately is what the Fed is doing with its QEternity program, which shows no sign of stopping anytime soon, or maybe ever. 

This week’s chart compares the SP500 to the total assets held by the Fed. That plot is made up from the total of the Fed’s Treasury holdings and its mortgage backed securities (MBS), which are sometimes referred to as “agency” debt products. The agencies which that title refers to are Fannie Mae, Freddie Mac, etc. 

Putting the chart together this way helps us see just how important the Fed’s purchases have been to the task of sustaining the bull market for stocks. Whenever the Fed has decided to change the slope of the green line, the slope of the SP500 has also changed in a dramatic way. That makes it such an important question to contemplate a “tapering” off in the rate of growth of Fed assets, or even an outright end to quantitative easing (QE).

This chart also helps us see just how critical the Fed’s actions were in bringing about the awful bear market of 2007-09. Back then, the Fed just held Treasuries, and it did not start buying agency debt until January 2009. The Fed’s holdings of Treasury debt peaked in August 2007 at $790 billion, and over the next 17 months the Fed sold off more than $300 billion of those holdings. That’s right, in the middle of the worst liquidity crisis in decades, with banks folding and with Congress handing out tax rebates, the Fed was pulling liquidity OUT of the banking system. 

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