After posting declines in each of the first three trading days of the year, the S&P 500 (SPX) staged a ferocious snapback rally last Wednesday and Thursday. A collective sigh of relief and “here we go again” could be heard from both traders and investors. What were they referring to?

The strongest positive feedback loop in history, what has become known as simply the “V.” Since the beginning of 2013, once a pullback low is in place, the S&P 500 has marched straight up until new highs were reached. Every bottom has been a V bottom.

There seems to be a heightened awareness and even an expectation regarding the “V” bottom today, so much so that market participants don’t seem to entertaining any deviation from this pattern (as a side note, I find it interesting that Jeff Gundlach has entitle his 2015 market outlook “V”). From a sentiment standpoint, this is concerning. By the time everyone is aware of a pattern and expecting it continue it is probably closer to the end than the beginning.

And though we can’t rule out another race up to new highs, I would suggest there is another scenario that market participants should at least be considering: the post-QE environment.

The Post-QE Environment

Following the end of QE1 in 2010 and QE2 in 2011, we saw heightened volatility and deeper corrections in stocks (17% and 21%) which eventually brought about new Federal Reserve stimulus measures.

The most recent round of QE (QE3) ended in October, and while we have yet to see a deeper correction in stocks we have seen a noticeable increase in volatility. These current levels of volatility have in the past been associated with periods of increased market stress.

We are also starting to see an increase in the ratio of long duration (30-year) treasury bonds to stocks, a defensive signal similar to what occurred following the end of QE1 and QE2.

Additionally, high yield credit spreads have been widening, mirroring the path higher after QE1 and QE2.

To V or Not to V?

By next week, we should know if this is yet another V or something different than we have seen in a long time. Regardless of the near-term outcome, though, the broader message is clear: the low volatility environment that had been in place is changing. Importantly, with this change we are seeing broad-based defensive behavior:  credit spreads widening, inflation expectations falling, treasury yields plummeting and defensive sectors leading. Collectively, this behavior suggests that the risk/reward is changing, and not for the better.

After six consecutive years of gains, this subtle shift in environment is undoubtedly going unnoticed by most investors. What would get their attention? You guessed it: only a failed V.