On Monday, the S&P 500 hit 2000 for the first time ever. This target was something I laid out very early this year following the Federal Reserve announcement in December that they would begin tapering the current Quantitative Easing (QE) program. To wit:
“This is something that I discussed previously. The chart below shows the historical correlation between increases in the Fed’s balance sheet and the S&P 500. I have also projected the theoretical conclusion of the Fed’s program by assuming a continued reduction in purchases of $10 billion at each of the future FOMC meetings.”
If the current pace of reductions continues, it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. This would imply an 8% advance for the market for the entirety of 2014.”
(Note: The chart has been updated to current balance sheet and market figures.)
Following last week’s conclusion of the Jackson Hole Economic Symposium, Janet Yellen did indeed confirm that current round of Quantitative Easing will be completed by October.  Via Bloomberg:
*YELLEN REITERATES ASSET BUYING TO BE COMPLETED IN OCTOBER
Next Stop 2100
Now that my target was achieved four months sooner than anticipated, and given that the Federal Reserve is on course to raise interest rates by mid-2015, the question is now “what next?
[For the record, no one really can forecast the future. These are just “best guesses” based on current data trends and are subject to exogenous shocks that change the underlying market dynamics.]
The chart below shows the current trend of the S&P 500 from the 2009 lows until present.
The orange dashed line shows the trend of the market from the 2009 lows through the initial market correction in 2010 following the end of the first round of QE. Very quickly, Bernanke figured out that the economy was far to weak too operate without support, and he quickly launched a second round of QE in September of 2011. However, the damage was done as the market broke the previous bullish trend line turning that previous support into permanent resistance.
