I hate to be that guy spouting out doom and gloom. Bears have been the laughing stock of the market for 4 years now as bulls and the buy the dip mentality continues to be handsomely rewarded. However, using the information I have gathered it truly seems as if a perfect storm may be brewing for the equities markets that is getting to such an extreme, I feel I cannot ignore the facts any longer and must begin actively making steps to protect myself from any potential downdrafts in the markets that may or may not be coming.
When I first started trading I thought to myself if the market crashes again, If I am close to the action surely I would be able to recognize some warning signs in time to get out before it happens again. Today I am recognizing some of those signs converging at once.
Quantitative Easing is a complicated process that is difficult to fully understand how it works. In essence QE started as an experiment after the financial crisis of 2008 designed by the federal reserve to spur economic growth and get companies hiring, reinvesting in infrastructure, and get the American economy moving again. Essentially what it is; The fed is 'printing money' to guard against deflation (the bane of borrowers) and keep the money supply healthy and flowing. (It has not actually increased inflation for whatever reason and why it hasn't is way above my head and the scope of this post.) The other main objective of the feds QE is to get the housing market booming again. By buying up mortgages and keeping interest rates as close to 0% as possible. The theory is that people will once again have the confidence and wherewithal to purchase homes. Increasing home and equity prices can also help contribute to the Wealth Effect as people feel more comfortable and willing to spend as the value of their assets appreciate.
Needless to say that QE has been an outstanding success in terms of home and equity prices. The market has rebounded astronomically to new All Time Highs and housing prices have been steadily working their way higher.
The fed is in the process of actively reducing monthly purchases and is planned to be completely done with QE by the end of 2014. The effect this will have on the markets is currently unknown.










