Updated: Feb 19, 2020
Retail trading has exploded in popularity since the 2009 market lows. We have seen an unprecedented bull run for almost 11 years now. But what most people don't realize is that the Federal Reserve is completely responsible for this rally. In 2008 as the market was approaching lows the Fed began experimenting with increasing their balance sheet (QE 0). But in 2009 they began the “official” purchase program of US Treasuries and Mortgage-Backed securities known as Quantitative Easing (QE 1). Ever since that point, the market has shifted in its basic character. Traditional measurements such as sentiment, technical analysis, seasonal patterns, and market cycles have shifted. This is why it is absolutely critical to have an objective measurement of the Fed's daily activity and its impact on the markets. This is why I created the "Fed Juice" which tracks this exact influence on the markets. For some, it is hard to believe that central banks can have such a strong influence on markets. However, when we look at the markets in terms of the Fed Juice the relentless rally in markets begins to make sense. Below is a weekly chart of the S&P 500 (white) vs the Fed Juice (red). The Fed Juice is surging to all-time levels and the market is following.
The Fed Juice and market price are two mutually exclusive events. Yet, time and time again the markets generally follow the path of the Fed Juice. In fact, I have yet to see this Fed Juice fail across a broad time frame. Since 2009 the Fed has improved its methods of capital deployment. What we have now is a streamlined "silent" QE that goes on seamlessly behind the scenes. As I measure it the Fed Juice is at all-time levels beyond any quantitative easing period. I see no signs of this slowing down. We have entered a new permanent era of central banks working hand in hand with financial markets.
What does this mean for financial markets? It is important to track this Fed Juice across time to gauge the general health of the markets. I post the daily Fed Juice indicator on twitter daily to track rallies and pullbacks based on the Fed. Currently, equity markets are in a rather healthy state where they are responding to the Fed Stimulus. But it is important to monitor the situation to see if things change in the future. We cannot know what will happen in the future. However, we can track the responsiveness of the markets to the Fed. If this character changes I believe it will be reflected in the Fed Juice.