Back on October 31, when QE3 officially ended (if only to be immediately replaced with both a boost to the BOJ's own monetization and the frontrunning of the ECB's QE), many predicted that the uncanny correlation of the Fed's balance sheet with the S&P would no longer be applicable. And indeed, for a few weeks, even as the Fed's balance sheet had stopped growing (delayed settlements that hit the H.4.1 are just that, and not indicative of actual open market purchases) the S&P continued to rise, hitting a level just shy of 2100 in the days before the new year.
And yet, calls for a decoupling between the Fed's balance sheet and the "market" may have been premature: following the latest selloff, the S&P's "strange attractor" is once again a very old and familiar one: the size of the Fed's assets, which - if only for the time being - have stopped growing.
Behold the markets since the end of QE3:
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Ironically, those calling for a selloff after the end of QE3 were right, if wrong on the asset class: crude is down 40% since the end of QE3!
Shown in a longer timeframe, several more down days and the S&P will have caught down where the stock of the Fed's balance sheet suggests it should be:
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And as a reminder, this is what happened when QE2 ended: the S&P ignored the balance sheet for a while back then too, however at least they still responded to the long end of the curve.
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