Yellen and Bubbles

It is one thing to say there is a bubble, it is another thing to do something about it.  Like Greenspan in 1996, she mentions it, but does not thing to stop it.  The Fed can raise margin requirements on stocks if it wants to, but if it didn't do that in the biggest stock bubble of our lifetimes, 2000, what makes you think they will do that now?

So the Fed won't stop the bubble, and probably won't raise interest rates in middle of 2015 unless S&P stays above 1900, economy holds up and doesn't slow in the next 12 months, and there are no flare ups in emerging markets or Europe.  That is a tall order.  Yet the consensus expects that.  I give the probability of all those things happening at less than 30%.  And it seems like the smart money agrees with me, because eurodollar futures are pricing in about a 50% chance of a rate hike by June 2015.  Not 100%, or even 80%, but 50%.  I would put it at 20% probability by June, rising to a 35% probability by September.

And I haven't heard a scant word about the end of QE, or the effective end, because tapering has whittled down the POMO to $35 B/month, which will soon be $25 B/month in August.  Effectively QE will be over by end of summer.  Without QE, a rise in stock prices is no longer a given.  The liquidity pump will have to come from money coming out of bonds to go into stocks, or vice versa.  So you won't be seeing so much rising tide of QE lifting all boats market, like you did this year, when bonds, stocks, and commodities all went up together.

The most likely scenario: Stocks selloff in August and September, and bonds rise as we approach the end of QE, and the market gets nervous.
Second most likely scenario: Stocks stall out and trade in a narrow range, and bonds fall moderately in anticipation of end of QE and possible sign of a rate hike in the future.
Least likely scenario: 3) Stocks keep going up into the fall and bonds fall hard in anticipation of end of QE and earlier than expected rate hike in 2015.

The market is in the topping out process.  Europe cannot take the baton from US to drive markets higher, and no way emerging markets can.  So US is left by itself to go higher alone, and that's just the large caps.  Small caps have been laggards all year, and especially this past few trading sessions.  Market is getting more and more vulnerable, and the CBOE put/call skew is flashing danger signs as smart money are paying a premium to buy put protection, while calls remain cheap.