I believe that we are entering into an important juncture in the stock market. When looking at the chart of the Dow Jones Industrial Average and S&P 500 since late August, you can see it’s been virtually straight up. I think the market should be in a trading range until the Federal Open Market Committee meeting concludes on November 3, and we see what in fact the Fed does. But I think it might be time to go short.
The rally over the past couple of months was precipitated by the prospect of another round of quantitative easing from the Federal Reserve, called “QE2.” Stock market gains have been based largely on hope, and little of substance. Corporate earnings have been good, but not great. Positive results have come largely from cost-cuts, not increased sales. As far as I’m concerned, those aren’t healthy fundamentals to base a rally on.
Other economic data in the U.S. are weak. The unemployment rate is at 9.6 percent and has barely budged over the past year, and the housing market probably hasn’t been totally washed out yet. Until the inventory is cleared out, I doubt the stock market can sustain significant gains.
I think we may see downward pressure in the stock indexes ahead, because I believe the market will be disappointed by the scope of potential Fed easing. If QE2 disappoints, I would expect a correction that could create a good shorting opportunity for traders. The Fed is expected to announce another wave of U.S. Treasury bond purchases to help stimulate the economy, but it is likely to be more measured and much smaller than the $1.75 trillion of purchases made during the height of the financial crisis in early 2009.
The market has been trading on little else but hope, and QE1 didn’t work, so why would QE2? I strongly believe the Fed will disappoint, and Bernanke won’t come out with a pile of cash. I’d be surprised to see the S&P below 1,000, but I do expect a significant decline.
Please feel free to contact me with any questions you might have about the markets, and to develop a specific trading strategy based on your unique goals and risk tolerance.
Mario Maselli is a Senior Market Strategist based in Montreal with Lind-Waldock. He is accepting new clients from Canada and can be reached at 514-866-1858 or via email at mmaselli@lind-waldock.com.
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