As anticipated, the Fed’s minutes yesterday showed that the members of the FMOC are concerned about continued high unemployment and whether deflation will swamp the economy.

It was not apparent as to when the Fed would act by injecting more cash into the economy via the purchase of Treasury securities. No specifics as to the amount of money intended to be used were mentioned.

This entire act of Quantitative Easing (QE-2) represents an untried and unproven method based on nothing but theoretical economic models to get the economy moving forward by avoiding a return into recessionary territory at all costs. It’s questionable in my mind whether it will have any positive effect at all, and it remains to be seen what the backlash will be.

Obviously, the stock and bond markets have been enamored by the fact that help is on the way; and in the end they may very well be the only beneficiaries of this effort. In fact, as I am writing this in Germany, it’s 2:20 am PST, and the European markets have reacted favorably to the Fed’s minutes and are up over 1%. The futures indicate a stronger opening in the U.S. markets as well.

While QE-2 may have a short-term positive effect on your portfolio, I question whether it can solve any of the pressing concerns along the lines of high unemployment, a depressed real estate market or any of the other issues that ail us.

This may very well be the last bulled the Fed has in its economic gun; if it fails to get the intended results, there is bound to be a reaction in the stock market, and it won’t be a pleasant one.

Therefore, I maintain my view that it is better to participate in this rally in a conservative way, than to go all out and suffer the consequences when the inevitable directional turn takes place.

Made it over the big water hazard and arrived safely in Hamburg, Germany last night.

With the bond market being closed on Monday, equities meandered aimlessly and closed at or within a few points of the unchanged line.

There simply was no driver in sight to provide momentum in either direction; it almost looked like the calm before the storm. The storm could very well come in form of today’s release of the minutes of the last FOMC meeting, which will contain discussions on some of the Fed’s options.

Bearish news was released by the National Association for Business Economics as this group lowered its economic growth forecast for 2011 to 2.6% from 3.2%, which is still very optimistic in my view. Furthermore, they see unemployment remaining above 9% all of next year with a weak Holiday spending season ahead.

I wonder if Wall Street, with its unrelenting focus on the recovery, even considers the possibility that an economic slowdown has merit and is very likely to show up over the next few months.

With the markets having been on a tear since Labor Day, our Domestic Trend Tracking Index (TTI) has advanced at a very steep angle. The reason for that is that this indicator includes an interest rate sensitive component, which has, due to lower rates, exaggerated the slope.

Let’s take a look at an enlarged portion of the TTI to the left.

Upward momentum caused a break-away gap in the chart (see arrow) recently, which means that the previous week’s high was lower than the next week’s low. As I have written before, these gaps will always be “closed” eventually when prices decline again to a point that represents the beginning of the gap.

The timing of it is the unknown. Take a look at the left side of the chart and notice the exhaustion gaps during the selloff in 2008. They were eventually closed as the prices rose above them in 2009. It works the same in reverse.

Over many years of studying charts, I have found that accelerated up moves, such as we’ve seen recently, will very likely be followed by equally sharp moves to the downside. Just because a gap has occurred, however, does not mean the eventual downside reversal will stop there; it merely serves as a point of reference.

To me, it’s a sure thing that a pullback through at least the gap level is in the cards. When that will happen is anyone’s guess. All you can do is be prepared via your sell stops to deal with it, should a reversal turn out to be more than just a temporary correction in a bullish trend.

As announced in last Friday’s weekly update, I will be travelling to Germany over this weekend and will not have a chance to update the blog. Regular posting will resume this coming Monday at the usual time of around 6 AM PST.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Despite a terrible jobs report, the major indexes closed to the upside.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved above its trend line (red) by +6.88% (last week +5.78%) and remains in bullish mode.

The international index has broken above its long-term trend line by +6.77% (last week +5.43%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

It’s amazing that obvious bad news does not send the market into a tailspin. This was the case yesterday as bulls and bears exchanged punches with no clear winner apparent.

Causing some upheaval was the ADP National Employment report, which pointed to falling private employment during September. To be exact, U.S. companies shed some 39,000 positions in September after having added 10,000 in August. Expectations were an increase of 18,000; surely a disappointment.

This is only a precursor of what is to come on Friday when the big jobs report will be released. It’s hard to imagine what ammunition the bulls might use to drive this market higher, should those numbers come in worse than expected. However, these days you never know. Maybe all this strength is simply because father Fed has promised to put a floor under the U.S. economy and save it from an early demise.

While the markets meandered in response to yesterday’s news, the dollar dropped while gold rose again. Bonds rallied indicating to me that more economic weakness lies ahead.

Of course, none of this matters if the jobs report comes out to be half way decent, or is interpreted as such. In that case, you could see the bulls attempting to attack the Dow 11,000 level and subsequently head for the S&P; 1,200 milestone.