There is nothing like the prospect of continuing cheap money to provide a boost for markets. Investors can borrow money at less than 1 percent interest and invest in the market for a 5 percent or 10 percent return. It's a community carry trade - borrowing cheap and putting to high return assets. Inevitably some of this cheap money enthusiasm flows through to business and companies. Industry gears up, as reflected in the recent increase in United States' jobs numbers.

There is also another unintended impact. Cheap money contributes to commodity price inflation as speculative investors enter the commodity markets in a quest for even better returns than those available from equity markets.

The US Federal Reserve bank chairman Ben Bernanke has continually hinted at another round of quantitative easing - a QE3. With interest rates remaining at all time lows there are few policy options available to keep the US economy growing. When QE1 and later QE2 were introduced they were touted as extraordinary temporary measures. The continued talk of QE3 suggests these are no longer temporary. They have become part of the fiscal policy landscape.

When better-than-expected jobs figures were released the discussion centered on any potential delays to a new round of asset purchases this year. There was little suggestion that the program of quantitative easing might be suspended or abandoned. The market has become addicted to the prospect of continuing cheap money. The idea of quantitative easing has become a treadmill and it is difficult to step off it.

Eventually the process must be reversed. The current policy of buying of longer-dated debt - the TWIST program - effectively lowers long-term interest rates. When it comes time to sell down these holdings then the opposite effect will develop and upward pressure will apply to the longer-dated yields. Central banks cannot simply decide to take no action. If this excess liquidity remains in the system when economic activity rebounds then significant inflation is a real risk. Before the 2008 crisis the US federal bank balance sheet debt ratio was around 7.5 per cent of aggregate gross domestic product. It is now around 25 percent of aggregate gross domestic product. Solving the 2008 crisis from a low starting level of 7.5 percent was acceptable. Solving the next crisis with a starting level of government debt ratios at 25 percent is much more difficult.

The Dow is flirting with the 13000 level, driven in part by the impact of this continued liquidity and the prospect of more. This rise has some unusual characteristics. It is driven by a different style of investment involvement in the market. Usually a solid rally and upward trend in the Dow is sustained by a broad mixture of retail investment and institutional investment. Volume is high and liquidity is deep. There are many participants in the market.

The current rising trend in the Dow doesn't have these characteristics. The retail participation is improving, but it remains at historically low levels. Instead many retail traders are electing to participate in the market by using exchange-traded funds. These concentrate their activity on a few closely defined sections of the market. This concentration starves many smaller companies of funds that would normally come from increased retail investor participation.

Instead these retail funds are now flowing into the funds. Trading initiated by them is estimated to account for some 50 percent to 60 percent of total market turnover. When investors tell their ETF fund to buy, or sell, then the fund activity has a significant influence on market behavior. When market activity is dominated by a smaller number of players, then their individual decisions can have a greater impact.

This is not necessarily a significant problem, but it does change the strength and stability of trending behavior. The index is increasingly influenced by the behavior of a fund acting on the index. In the past the index behavior was more heavily influenced by the aggregate behavior of thousands of individual investors in an active process of price discovery. This reduced the general volatility of the market. A market increasingly dominated by a smaller number of more powerful players experiences an increase in volatility.

The impact on the Dow is to deliver a increasingly unstable upward trend that lacks broad spread support. The Dow index is bumping along a resistance barrier and this makes it more vulnerable to rapid retreats. If the Dow was bumping along a support level then there is increased opportunity for sustainable upside breakouts.

Dow theory uses the Dow transportation index as a leading indicator for the behavior of the Dow index. In the past week there has been a divergence of behavior. The Dow index continues to bump slowly upward, but the Dow transportation index has been developing an end-of-upward-trend pattern. The Nasdaq index is often used as a more accurate measure of the new US economy. Starting in 2008 the behavior of the Nasdaq has led the behavior of the Dow. In recent months the Nasdaq developed a strong breakout several weeks prior to the Dow upward-trend breakout. This week the Nasdaq is showing upward-trend weakness and this sounds a note of caution with the Dow.

None of these signal a major change in the upward trend. There is not yet any indication of a significant market collapse, but there is room for a strong retreat and rebound. The continuation of cheap money and the concentration of new capital in the hands of a relatively small number of exchange-traded funds will deliver some surges in market volatility. Investors who think the long-term trend stability conditions of 2005 to 2007 have returned will be disappointed.

Assets and market bubbles created by cheap money and the prospect of even more cheap money provide many trading opportunities but they do not last forever.

The author is a well-known international financial technical analysis expert.