Tuesday, August 2, 2016

Fed Tightened QE: Near Term Market Risk

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*We've been watching Fed reserve balances.
*They went down last week more than they have since 2012.
*That has typically coincided with down markets.
*We expect near term market risk.
We have been following Federal Reserve balances for months. We think it is probably the most important metric in the world today. While most central banks are easing at extreme levels, the Fed has been trying to tighten. With the markets up they may have picked their spot to start. We think this is a meaningful near term risk to the market (NYSEARCA:SPY).
Let's look at the Fed balances.
DateAmountWeek ChgYTD ChgSPY YTD
2016-06-224228829713320.60.17%0.08%0.77%
2016-06-294213862766793.10-0.35%-0.27%-0.69%
2016-07-064213862766644.230.00%-0.27%1.45%
2016-07-134213862766647.870.00%-0.27%2.51%
2016-07-204225546202408.160.28%0.00%1.47%
2016-07-274209382864330.18-0.38%-0.38%6.50%

This week's decline of .38% was the greatest since late 2012. This has usually coincided with down markets.
The Fed's massive liquidity spree has held markets up. We've been worried for some time that when the Fed reserve balances come back down in the Fed's plan for "normalization" the markets will come down with it.
Let's see the chart of Fed reserve balances to show that the weekly decline is not only the biggest week-to-week but it also takes the reserves below any time in the last year. We think that should coincide with a lower market.
Here's the Fed balance levels.