US stocks became “overbought” with Fed “juicing the stock market”

The S&P 500 fell 0.3 percent last week, ending a run that saw it gain for six consecutive weeks.

Michael Santoli at CNBC suggested that short-term trader sentiment had become “a bit too bullish” and as a result, the stock market had become overbought.

Nevertheless, Santoli added: “The basis of the rally since August remains plausible: that economic and corporate profits growth is troughing, the Fed has eased deftly off the brake with three rate cuts, credit conditions are fine, the Treasury yield curve is back to a normal slope, seasonal forces are favorable and big investors underinvested and prone to chase stocks higher.”

The Federal Reserve in particular may be “juicing the stock market”.

After a spike in overnight lending rates in September, the Fed pumped in lots of cash into the financial system, causing its balance sheet to swell by US$286 billion since early September to US$4.05 trillion.

“It's patently obvious that the Fed's interventions into the market is having a huge effect on the stock market,” said Danielle DiMartino Booth, a former Fed official who is now CEO of Quill Intelligence.

“Markets view any increase in the size of the Fed's balance sheet as QE and the $250B increase in just two months is no doubt helping to lift stock prices,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.