US Stock Market Drop Shows Fed Bubble Bursting

Wednesday’s market selloff is a sign that the bubble created by the Federal Reserve’s easy money policies is deflating, analyst Peter Boockvar said Thursday.

Noting the Fed’s bond-buying policy ended in late October, Boockvar said the New York composite stock exchange is now back to where it was last July and the S&P 500 will heading back to November levels.

“QE, for example, enlarges the bubble, and once the air stops going into the bubble, the bubble starts to deflate again,” the chief market analyst at the Lindsey Group said on CNBC’s “Squawk Box.”

Read MoreBiotechs could be the early warning for stocks
U.S. markets plunged on Wednesday, led by more than 2 percent declines in the Nasdaq and Russell 2000. The Dow tanked nearly 300 points, or 1.6 percent, while the S&P 500 finished the day about 1.5 percent lower.

The biotech and semiconductor sectors, both down 4 percent, weighed on the Nasdaq.

Boockvar called the move in biotechnology stocks a “classic parabolic reversal,” a technical indicator that shows a change in an asset’s momentum.

The Fed has missed its window to raise interest rates because it lacks the resolve to hike rates with average economic growth remaining below 2.5 percent, he said. The federal funds rate, the interest banks are charged for short-term lending to other institutions, remains near zero.

The central bank now lacks tools to tackle a further economic slowdown because it cannot drive down rates any further, he said.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza