Wait Till You Get A Load of QE3, The Next Phase Of LifeSupport Coming to an Economy Near You

by Dan August 8, 2011 8:18 am • Commentary

Well, the sky is most definitely falling and the only things up across the whole world is Gold (not unexpectedly making new all time highs), the Swiss Franc and the Yen.  Asia took the whole debt downgrade thing kind of hard with the Nikkei closing down 2.17% and the Shanghai Composite closing down 3.79%.  Europe’s bourses are in somewhat of a holding pattern until we see the full scope of our damage after the open…..our S&P futures were down almost 2.10% heading into the European open only to rally a little more than 2% as most European indexes saw muted responses.   Now, the DAX is trading near the lows of the session and the S&P futures have followed suit down almost 2.5%.  I guess what’s important from a trading perspective is too watch and see how markets respond to news perceived to calm things….for instance before the European open the ECB suggested that they may buy Italian and Spanish Govt bonds in an effort to calm equity markets, which it did for about 15 minutes causing a muted opening and then spending the rest of the day selling off.

I don’t have much to add on S&P’s downgrade, other than it seems both telegraphed/not unexpected and stupid at the same time.  The fact that any of the main rating agencies are still going concerns is a huge mystery to me after their failures leading up to and during the previous credit crisis.

THIS COULD REALLY BE THE DAY WHERE THEY EITHER DO SOME DAMAGE OR HAVE A SHARP SNAP-BACK REVERSAL.  I’ll let you know when I have some conviction either way….I continue to think that you have to keep and eye on some big crowded stories like AAPL, everyone wants to buy it and that is why it showed some decent relative strength in the past week, but if a couple large holders decide to head for the door to raise some cash, maybe for forced reasons then you could see a quick swoosh lower.  I like everyone else want to buy that swoosh, but be smart about it, careful selling puts to do it….I will be buying weekly call spreads for the initial bounce and then look out to Sept to catch iPhone 5 announcement.

When you look at the chart of the SPX and you get a sense where the futures are trading it is very clear to me that we are now going to 1150, and not unlike our attempt to break out/down through there levels we usually get a pause as there is substantial resistance/support at these nice round numbers.  Now that may seem a bit pedestrian, but when you look at the charts they are just simple levels where traders place stops around.

1 Yr SPX chart from Bloomberg


The QE2 rally started around 1050 last September, about  12.5% from Friday’s close and 10% from current levels where the futures are trading.  If QE3 is in consideration than doesn’t it mean that QE2 was basically a failure?  And if so will the equity markets, one of the target recipients of all that money printing, be apt to rally on the same stimulus?  I think we could see a very different response in the near term as to what we saw last Sept following Jackson Hole…..this time it is out of severe desperation, our economy is standing on the precipice of a double dip recession.  Our economy and thus our markets have been on govt life support since late 2008, as evidenced by the reaction to the end of QE2, and  a whole host of other factors beyond our control. We are not ready for the feds to take the pedal off the medal.

So make no mistake about it, the Obama people, and the Boehner people get that for them to stay in office they need to turn things around and quickly, and well, the Tea Party people, they are still privately amazed that they have a seat at the table.  Stimulus is coming and it may not be the garden variety that we have become used to.  The govt showed us that they still have plenty of ways to be creative when they released oil from the Strategic Petroleum Reserve back in June…..we are likely to see a whole host of tinkering.

As for stocks, be careful here, you will hear a lot of dumb money come on the TV and say that they think Standard and Poors are stupid, and that this is the buying opportunity of a lifetime.  They are just talking their books. I would say, what’s the rush? Unless you think tomo’s FOMC meeting will signal the mother of all stimulus.  I just don’t have the answer to that one, but if the debt ceiling debate has taught us anything there are those in Washington who are desperate to get re-elected and those who just don’t get it.

So my take, no reason to be a hero here, i tried picking a bottom a couple times Friday and it didn’t work very well.  I am going to take a shot on the next real panic, especially if that comes before tomorrow’s FOMC meeting.   Cut loses and move your feet in a market like this, remember it is no fun selling on the bottom but some times you just have to cut some losses, don’t be afraid to sell a portion of a loser.