Out Of The Deep Red

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Yesterday’s market activity reminded me of the classic Clint Eastwood movie titled “The good, the bad and the ugly,” only in reverse.

The major indexes started out looking very ugly, then looked bad and ended up looking pretty good, as most of the losses were recovered by the end of the day.

Earnings misses were one reason, while disappointment with durable goods were another. Commodity prices headed south while the dollar rose.

Technically speaking, the S&P; 500 is struggling to break through the glass ceiling in the 1,184 area. But the mother of all concerns was the Fed and how big of a move it will make next week.

A WSJ story casts doubt on the magnitude of the planned QE-2 intervention. It seems like the markets have priced in a major sum, something along the lines of $2 trillion.

The story suggested it may not be a shock and awe effect as hoped for, but the amount could very well be limited to a few hundred billion dollars to start with while measuring its effect over time. That indeed would be a disappointment to the markets as much more was expected.

Again, it’s just a story, but it shows the uncertainly not only in the markets but in my view also at the Fed. We are entering unchartered territory, and no amount of monetary injection can interrupt the trend (economic slowdown) that is currently in place, and we will very likely not prevent a double dip from occurring—at least in my opinion.

It’s anybody’s guess how much volatility we’ll be seeing next week. Depending on the election outcome, there could be a huge relief rally and then a reaction to the Fed announcement.

My suggestion? Be sure you know where your sell stops are.

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