If you have not yet read Is Part 1: Is This Decline The Real Deal? available free to all readers, please click here to read it first.

In Part 1, we looked extremes in valuations, sentiment, leverage and complacency, and how these make the Bull case for further advances in stock prices difficult to make without drawing this time it’s different parallels with previous asset bubble tops.

In this Part 2, we’ll look at how the fundamentals of the Bull case have been weakened or threatened, and determine whether indeed we are witnessing a key moment of direction-reversal in the markets.

The Federal Reserve’s Tapering of Quantitative Easing

Everyone who follows the financial news is aware that the Federal Reserve has tapered its unprecedented Quantitative Easing bond and mortgage buying program from $85 billion a month to $25 billion a month, and has made noises about ending the program entirely by October of this year.

Observers see two primary consequences of the end of QE:

1.  Interest rates, no longer suppressed by Fed bond and mortgage buying, will likely tick higher from historic lows.

2.  The support for stocks and other risk assets provided by QE will end, removing a key prop under stocks.

It’s clear that interest rates—shown here by a commonly used proxy for interest rates, the 10-year Treasury bond yield—have hit bottom, and while they might bounce along the bottom for some time, they don’t have much room to decline even if “risk-off” buying of Treasuries pushes the T-bill yield lower.

In other words, even if Treasury yields fall as investors flee ‘risk-on” assets such as stocks for the safety of Treasuries, this doesn’t necessarily translate into…