First, it’s a victim of its own success.

Until around 2008, no one cared about the Fed. It was the nerdy kid who never got invited to the party.

The market used to snooze through its policy briefs.

But since the global financial crisis began, you could say the Fed’s “stock” has been on the rise. That’s because it boldly claimed it could fix the problems. If you ignore the economy, and only look at the equities markets, it seems the Fed has done just that.

Look at the lift quantitative easing (QE) has given to the S&P 500 since 2009:

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QE1 pushed the S&P 500 up 47% between March 2009 and March 2010.

QE2 pushed the S&P 500 up 10% between September 2010 and July 2011.

Operation Twist and QE3 pushed the S&P 500 up 21% between October 2011 and December 2012.

And now, QEternity has added 15% in 2013.

So now the market believes the Fed has magic bullets that can fix anything. What’s more, equity investors are now addicted to the stimulus… speculating when the next booster shot will come and clamoring for more market-moving rocket fuel.

The market’s expectation for continued stimulus is pressuring the Fed to keep up the act. And they’re not disappointing with the promise of $85 billion a month until, well, whenever they feel like stopping.

But now they have another problem…

The S&P 500, prior to the dip that began May 22, is trading at all-time highs. That means the Fed can’t claim the equity markets need saving or fixing. Ok… they’ve never outright framed their justification for easing this way, but it’s been the unspoken understanding of equity investors.

It was easy to “sell” QE1 after the S&P 500 dropped 41% between October 2007 and January 2009.

It was easy to “sell” QE2 after the S&P 500 dropped 12% in a five-month period.

It was easy to “sell” Operation Twist and long-term-refinancing operations (LTRO) after the S&P 500 dropped 16% in two months.

But now, with the market addicted to the Fed’s constant drip of happy juice, it’s troubling to think about how painful a cold-turkey withdrawal would be.

While it’s hard to say exactly what the Fed’s exit strategy may be, one thing is clear: It’s now THE guest of honor at the (stock market) party… and everyone’s hoping it shows up with a boat-load of booze.

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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.