How do you know that he quit?
Of course, I've been wondering this too. I know that he worked on The Muppet Movie a few years later. I have read posts by people who think that his puppeteering was bad, so he could have gotten fired, or he could have thought he wasn't a good enough puppeteer. Then again, a few years later he would have regular roles on The Great Space Coaster.
I also noticed that John Lovelady didn't perform very many major roles. He performed Nigel and Crazy Harry, and both weren't that major. Crazy Harry only appeared in a few episodes each season, and Nigel only talked three times in the first season (and Lovelady only performed him in three episodes). Though the guides section of Muppet Central mentions that he had a great singing voice, I can't think of any major singing roles that John Lovelady had (his most major would have been I'm Looking Through You, and that was a UK spot.... also, in that number he alwasy sang at the same time as Richard Hunt, never getting any solo lines, and both ghosts soundded really similar).
I do know that he was a puppet builder as well as a performer, and he'd been both for a long time, though he seems to have been a puppet builder more. I've read that he built puppets for Sesame Street but seldomly performed on that show. During the first season of The Muppet Show Dave Goelz also worked in the Muppet workshop, but thoguht it was time consuming to be both a performer and a puppet builder (though Goelz did perform way more characters than Lovelady). Perhaps John Lovelady thought the same.