Is the Taper Responsible for Weak Stock Market Closes?

Yesterday we highlighted here that the number of weak stock market closes was on the rise, which usually portends some bumps in the road for stocks going forward. Today we thought we'd have a look at the relationship between weak closes and Fed tapering of asset purchases. In the chart below we plot our Weak Close Indicator on the left axis (inverted) and on the right axis we plot the 3 month change in total Fed assets assuming the tapering process continues as planned. We find a pretty good inverse relationship between the rate of change in the Fed's balance sheet and the number of weak stock market closes. Said another way, when the rate of Fed balance sheet expansion increases the market sees fewer weak closes, and vice verse.