SPX -- Daily, Longer Term

US history shows that there have been few large bouts of sumptuous - sized QE and when they
are brought to a close, it is bad for the economy and for the stock market. QE 3, which was one
of the biggest programs, closed out last autumn after an extended period of tapering. The economy
has slowed markedly as expected but has not tanked, and the SPX has continued on to new highs
but with a steady erosion of positive momentum. The powerful run in the market from the latter
part of 2011 was based on the QE program and rising investor confidence as evidenced by a large
increase of the market's P/E ratio. It was a spectacular move which would have the SPX at 2400
now had it continued its brisk pace. SPX Daily

The SPX is still in bull mode, and my primary fundamental indicators have seen some erosion,
but remain positive, so there is no sell signal from me. But, the tempering of investor confidence
since last summer is appropriate. QE or not, whenever the Fed freezes the size of its balance sheet,
there is eventual trouble for the market, and the longer the freeze, the bigger the trouble. At present,
there is sufficient monetary liquidity in the system and plenty of financial support in the banking
system that the economy can regenerate sufficiently from a punishing winter to provide better
earnings out ahead. As long as consumer, business and banking confidence holds up, the
financial wherewithal and resources are there to support growth through 2016. The stock market
could be adversely affected initially when short term interest rates begin to rise, but should
have the resiliency to weather the end of the ZIRP and move on so long as the Fed follows a
slow and very gradual course.

If the economy can successfully transition away from dependence on QE, and confidence holds
up, then the next major threat to the stock market would come as monetary liquidity in real terms
begins to dissipate just as confidence moves into a frothier period. But that is not in the cards
right now. In the meantime, investors will have to put up with the volatility that may continue
as the economy moves into a more self - sustaining mode.