"One should always play fairly when one has the winning cards." -- Oscar WildeNEW YORK ( TheStreet) -- The S&P 500 hit another all-time closing high Monday, widespread euphoria is building and the belief in the power of quantitative easing over markets has likely never been higher. For good reason: It has been almost a year and a half since the S&P 500 experienced a 10% correction and the S&P 500 has not tested its 200-day moving average the entire year. This is the furthest the S&P 500 has gone into a year without a test of its 200-day moving average since 1995. However, a nagging disconnect has developed amid this strength. If you recall, the twin pillars of Federal Reserve Chairman Ben Bernanke's wealth effect thesis were stock prices and the housing market. While there is no question the stock pillar remains strong, the housing pillar is starting to show some cracks: Homebuilder equities, as seen by the SPDR S&P Homebuilders ( XHB) exchange-traded fund, peaked back in May and in yesterday's session hit a new one-year low relative to the S&P 500.
Now, Bernanke will tell you that QE has helped with both paths but the data suggest otherwise. Job and income growth remain anemic and well below prior recoveries. Thus, we are left with artificially suppressing interest rates and the current conundrum. If a 0% Fed Funds rate for almost five years and record mortgage-backed securities (MBS) purchases are not enough to keep rates down, has the Fed lost some control over mortgage rates? If so, the Fed has three options today: (1) cease all taper talk and continue with QE much longer than the market is anticipating, (2) increase MBS purchases (if current levels are no longer working, we must do more) or (3) acknowledge that the benefits from QE are waning and the risks of further increasing the Fed's balance are rising exponentially, beginning what is likely to be a painful (but necessary) process of withdrawing from the mortgage market. Given the ideology of the Bernanke Fed, you tell me which option is most likely here. Follow @pensionpartners This article was written by an independent contributor, separate from TheStreet's regular news coverage.