Quantitative Easing - Effect on the Market

This recent Bloomberg chart-or-the-day shows the close correlation of the rise in the S&P 500 to the rise in Fed assets (which is the result of QE I and QE II).

(Click on chart for easier viewing)

QE II is scheduled to end on June 30, 2011. Since markets are forward looking, investors will likely discount the end of QE II well before June 30th.  Due to the current political environment, a potential QE III may not be forecoming. Is the market and economy really ready to stand on it's own? We will see.

The talking heads have blamed the present market woes on the headlines, i.e. the devastating earthquake in Japan and the troubles in the Libya. The market actually began showing signs of distress prior to the earthquake and the escalation of events in the Libya. For example, the decline of certain leadership stocks.

Last Thursday and Friday the market rallied off of oversold conditions. The rallies seemed to lack conviction and volume was light. The next down-leg will provide us with more insightful information as to whether or not the correction is over.

Headline news driven markets are unpredictable. I remain cautious.