US stock market, QE, and the Yellen put

The chart at the top of this post is a weekly bar chart showing the cash S&P going back to the start of the current bull market in March of 2009. This bull market has been sustained by three distinct quantitative easing programs by the Fed which I have indicated by green lines on the chart. Roughly speaking, the S&P advanced substantially and persistently during these periods but only gradually and with significant setbacks after QE was halted.

The biggest of these three QE programs ended last October and as you can see the S&P has been swinging up and down with a slight upward bias since then. The question now is whether the end of QE III means that a bear market is imminent.

From a purely monetary point of view I think the answer has to be no. US stocks are influenced not just by the Fed but also by the actions of other central banks since liquidity flows freely between major industrial nations and their economies. The second chart is a daily bar chart showing the European Stoxx 600 average. It has been in a strong up trend recently in response to the announced and since implemented QE program by the European Central Bank. This program of monetary expansion is scheduled to last at least through the end of 2016.

The bottom chart is a daily chart of the Japanese Nikkei stock market average.At the end of 2012 the Bank of Japan announced and implemented its own, open-ended QE program which is still going strong. Since then the Nikkei has more than doubled.

I think the European and Japanese QE programs will impart an upward bias to US stock prices as long as both continue. Moreover, I think the US market will be supported by what in effect is the Yellen put. Investors are confident that should the US market show any substantial weakness - say a drop of 15-20 % as in 2011- then the Fed will step in with yet another QE program to prevent the economy from sliding down hill.

Of course the world economy is truly in uncharted waters, guided by the QE programs of central banks. To be prepared for unforeseen circumstances I think it is best to take seriously any drop in the S&P below its 40 week (200 day) moving average (red line) for such a drop would probably herald the 15-20% decline I just mentioned.

In the meantime the main thing to monitor is the intentions and actions of the central banks. I am not concerned by any short term interest rate increases the Fed my engineer because in a strong economy interest rates will be substantially higher than they are now.  But any hints by the Bank of Japan or by the ECB that their QE programs are about to end would be very, very bearish for world markets.