Back when QE was new there was an excellent financial meme claiming that all you had to do to make massive returns in the market was to buy the dip as the Federal Reserve was going to buy everything forever and drive prices up. As such, you bought as many assets, especially equities, as you could possibly manage, even to the extent of borrowing as much money as possible to do so.

This turned out to be true and anyone following to the max the sarcastic humor of that prescient video would have made a lot of money.

Well, today the Federal Reserve is selling everything forever so the opposite should be true.

Perhaps not.

The trick to investing is to understand the basic trend or mechanism of the market and then everything else follows from that thesis. I always say, all you have to know about a stock is whether it is going up or down and this is annoyingly and indisputably true. The core understanding must be about the general market though, because it is a rare stock that can buck a bear market.

So what is the trend in this new reverse QE world?

The market cracked at the beginning of the year and corrected. I expected it to crash but it didn’t happen. Simply, this was because the central banks won’t let markets crash anymore, or at least not if they can help it.

This makes perfect sense; crashes are the opposite of market stability and since the credit crunch crash or so-called ‘global market crisis’ the central banks have honed their art to prop up markets by providing liquidity to enable market participants to put on carry trades to support the market when it goes out of bounds.

So you can wave goodbye to stock market crashes outside of something spectacularly bad and unexpected happening. A correction can happen but a crash is not going to be allowed or at worse a market panic is going halted.

So where does that leave us?

The market is in a bear. The liquidity being sucked out by the Fed is currently drying up credit in the high yield risky carry trade lands of the emerging markets. They are feeling the pinch. This tide will creep closer and closer as the months go on and the reverse QE amounts rise.

So the market should trend lower or at best sideways.

Yet in this highly managed situation the central banks are going to want to hold the market  in a range so they will adapt their liquidity to let fiscal stimulus and economic growth take up the slack, so with the right level of tweaking, in this conjecture the markets are going to zigzag sideways for a few years as the central banks get their balance sheets in order.

So we are still in ‘buy the dip’ land but we are also in ‘sell the rally’ land too. For an investor this is an uncomfortable place to live. Buy and hold is so much easier. Swing trading is the game of traders and while swing investing might make great returns, it’s a lot more effort.

So what could go wrong? This is a similar situation to the post-dotcom crash when the Fed made a ton of liquidity available and the non-bubble markets became stuck in a range for years and the economy caught up with the once heady boom equity valuations. Only 9/11 and its after effects broke that spell.

This is the kind of environment I am now positioning for. In such a world, good companies get smashed if they disappoint. Bad news can make huge short-term impact but because the market is being supported, such basically solid stocks come back nicely. As such, medium-term value investing is where some fat returns are to be had. When those stocks regain their poise you dump them.

If you like to have a core portfolio then you have to be risk off in that stance and combining the two ideas you have defensive dividend payers at the low risk long-term end of your portfolio and high-risk medium-term holding of solid companies with the right sort of bad news. Meanwhile, you keep a fat cash balance to buy stock dips and market dips, shifting to risk on as the market falls and risk off as it rises.

The market can still crash but it will take something very nasty to do that as the Fed seems to be determined to be responsible for the havoc a crude reverse QE could create.