What Will The FED Do When The Trend In Stocks Breaks?

When you review the stock market up trend since March 2009 you’ll find a surprising correlation between the point at which the trend breaks and the time the Federal Reserve (FED) steps in. This chart illustrates the correlation.

 

• In June 2010, the S&P 500 index up trend in prices broke when the 50 day moving average (DMA) fell below the 6 month DMA. The FED responded by hinting about resuming Quantitative Easing (QE) and stocks respond higher. The FED then implements QE2 with $30 billion a month in bond buying in July, August, and November and stocks respond higher.
• Stocks broke down again in September 2011 and the FED initiated “Operation Twist” with $400 billion more in bond buying. Stocks respond higher.
• Stocks went higher until the European Union (EU) crisis erupted in Greece, Portugal, and Spain. The trend in stocks broke again and the FED stepped in with $40 billion a month in bond buying, stocks respond higher. 
• December 2012, stocks break down and the FED “extends” QE. Stocks respond higher.
• Stocks peak on August 2, 2013, the S&P hits 1709 and then falls 4.6% in 17 days. On September 18th,FED holds off “tapering.” Stocks respond higher. 
• Stocks peak on September 18, 2014, the S&P hits 2011 and then falls 7.4% in 21 days to 1862 on October 15.

The FED response?

On October 17th, FED President Bullard hints that QE should continue and stocks respond higher.

Now with the FED out of ammunition what will the FED do next when stocks break lower?

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The Secular Advisor

The Secular Advisor periodical illustrates perspectives on the US economy and asset allocation.

Here are some of the topics covered:

• Inflation and GDP
• Employment and wage growth
• Major asset class, sector and country fundamentals
• Asset class inputs and models
• Asset class price and volatility trends

It is designed to keep you better informed and to help you make better asset allocation decisions.