It’s all about the Fed?
Maybe not all, but certainly a lot has to do with the Fed and the QT.
SPX topped out (the first “top”) right at the time the QT started to accelerate. The chart shows the SPX, orange, and Fed’s balance sheet, white. Trump might have some short-term impact around his tweets, but Fed’s path longer term is set to shrink the balance sheet.
The below chart shows the same as the above but on a shorter time period, since September last year. It is almost as the Fed’s balance sheet serves as a mean reverting line for the SPX to trade around.
We are not arguing for correlations nor causality, but the fact Fed is shrinking the balance sheet will be important, especially after big bounces we have seen over past weeks. Therefore, it is important watching when Fed will be active, because when they “take liquidity” out of the market, SPX tends to follow.
Below is probably the most important chart you will see today. It shows the SPX and the QT. Short term there is some potential hurdles as Fed will be sucking liquidity out of the market sooner than later.
Source: charts by Bloomberg