The S&P is Starting to Worry About the Fed's Put

Fears of the almighty QE taper sent the S&P 500 down 1.1% today. The Fed's bond purchases (aka QE or liquidity injections) have been pushing up "risk assets" since 2009 (see Tepper rally 1, 2, and 3). So if the Fed decides to taper QE at its December 17-18 meeting or in the next few months, market participants will then start to price-in the probability of future tapers or even the end of QE, which could be a tough adjustment for the market. The loss of the Fed put could be a headwind for the stock market and asset prices for years, and we're not even talking about a new tightening cycle yet! On Bloomberg TV in September, I thought former hedge fund manager Stanley Druckenmiller had interesting views on QE:

But if you tell me QE is going to be removed over 9 or 12 months, that's a big deal because it's my belief that QE has subsidized all asset prices and when you remove that subsidization, the market will go down.
The minute you have this phony buying stop, it can go down on no volume and it can just reprice immediately. I personally think as long as this game goes on, assets will stay elevated. But when you remove that prop - and let's face it, the Fed has said they are targeting asset prices - those prices can adjust immediately."

You can see that the market is already starting to price in some kind of stimulus reduction. The Volatility Index ($VIX) is moving higher and the S&P 500 is testing an important support level.


Also, this chart of the S&P 500 that John Hussman, President of Hussman Investment Trust, keeps posting doesn't look like it will end well. It's probably a good time to own put protection to hedge against a severe correction.

Source: Hussman Funds

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