QE-2, what else!

All eyes await the Fed  post – election. It is a sign of the times that every event is heralded as a potentially big, bad, binary, blow-up, blow-out whatever.  $500-$1T of QE-2 was making the rounds recently. You can make a case that too little causes the market to sell off as expectations are not realized. Too much and the market sells of again as fears of economic slowdown will appear confirmed. Either way, it can be read as bad news for equities. For bonds, particularly corporates, you can make another binary argument. Improving economic activity will mean rising yields, and economic slowdowns will mean rising default risk and again rising yields. The Fed purchase of QE2 is a drop in the bucket in such  huge market, $90T and counting.  Binary analysis like this makes one comfortable with big bold bets  but the only one worth making, as JPMorgan famously said, is that the market will fluctuate.

Despite both binary arguments suggesting downside, it looks too obvious to me. The last year has been one of people getting aggressively bearish every time there is even a mild decline and that provides the fuel for short-squeeze driven rallies. Besides, I think money will come out of bonds as the stock market rally that has paused this week shows signs of resuming. I also think  nothing dominates the urgency with which the banks have just got to be made solvent and to start lending again.  The SEC and the CFTC are busy making Dodd-Frank motivated rules, but the prop trading desks are busy making the money before those rules come out.  All pullbacks are for buying, this will continue till the last bear is a convert and that is still somewhat far away.

I am cautiously net long, technically  there are all kinds of SPY support levels before 1130 which will cause many to turn bearish and me to re-evaluate.

Checked in to proof  what I wrote in a rush this afternoon and find the futures are up 8 on the S&P, 70 on the Dow. It is a new month,automated monthly contributions get put to work. A lot of the money in this rally has been made either before or after hours when retail investors usually don’t play…

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