Some Volatility As Markets Remain Flat

Opening Market Commentary For 06-20-2012

Unexpectedly Mr. market decided to open in a falling manner under light to moderate red volume. The markets are generally battling the 100 day MA as their resistance line. $RUT is still way below its 100 day MA and is struggling to keep above its 50 day MA. The small caps have lagged behind while the large caps have tried to push the markets up. But without the small caps participating any continued bull push higher is going to be in vain. Trading was in a tight and narrow range while some traders were exercising their trading rights in light of any FOMC decision today. Everything rests on what Dr. Ben has to say and the general felling is that he is going to re-read his last statement of being vigilant and ready to act if necessary. The short and long 3X ETF’s have barely moved signaling traders to hold positions. The RRR (risk reward ratio) is trading in an extremely narrow range making any trade very risky in hopes of any profitability. By 10 am some ‘dippers’ came out to play turning the light volume to green for a few minutes and returning to red as the volume fell to low levels.

The US MBA Mortgage Applications, rated low in importance, gauges demand for mortgage application in the US tracking new home mortgages and refinances reported this morning at -0.8% down from the last report of 18.0%. The premarket did little to react at that news. The big news is still the FOMC’s decision to change rates and followed by Ben Bernanke comments on the Nations finances and what they are going to do.

The DOW is at 12836 even.

The 500 is at 1356 down 1.01 or -0.08%.

The $RUT is at 786 down 0.24 or -0.03%.

SPY is at 135.58 down 0.10 or -0.07%.

The trend is neutral and the current bias is down.

WTI oil is at 83.03 falling from highs in the mid 84’s earlier this morning.

Brent crude is at 95.05 currently falling and trading in the low 95.00 area.

Gold is down today at 1599, trading between 1622 and 1594 with a negative bias.

Josh Cohen article below also reflects my reasoning of what will happen under different scenarios the Fed will attempt to do. As I have reiterated before the FED is going to be reluctant to do anything because of heavy pressure from the Conservative Right and unwillingness to appear to be President Obama’s lap dog. Every Keynesian in Obama’s Administration want more QE as they feel the Fed’s never did enough the first time around.

Firms Predict Fed Will Announce QE3 by Josh Cohen

By afternoon Wednesday, the markets will know whether or not the Fed will launch QE3 or not.

I think there are three possible actions the Fed could take:

1. Provide additional stimulus to the markets by announcing QE3, perhaps in conjunction with an extension of “Operation Twist” as well;

2. Only extend Operation Twist, but not initiate QE3. Operation Twist is scheduled to be completed at the end of June and the Fed could simply choose to extend it.

3. End Operation Twist and not initiate QE3.

As an article today from CNBC notes, Hatzius believes that Operation Twist has not been that successful, and that he would be “extremely surprised” if no additional announcement of QE took place.

The question is how might markets respond to the different scenarios above? I believe that if the Fed does announce an outright QE3, we will likely see stocks gap higher, at least temporarily. . . If the Fed only opts to extend Operation Twist and/or do nothing at all, then I suspect there will be a widespread sell-off. . . I could certainly imagine that markets will “buy the rumor” of QE3 in the morning and then “sell the news” in the afternoon.

Morgan Stanley Sees QE3 Rally Lasting Hours Not Weeks

We have quite vehemently reminded readers of the dismal drop in US (and global) macro data over the past few months. These disappointing economic surprises and the ensuing global growth weakness will, Morgan Stanley believes, lead to a global policy response (rate cuts where rates can be cut and QE where they can’t) and while they expect this monetary policy to work in many important emerging economies, they are doubtful as to whether it will make a material difference to growth in developed economies.

Certainly, there are obvious risks to growth (Euro rupture and US fiscal cliff) that could counteract any QE effect but they rather critically note that unconventional policy is effective when the issue is systemic stress; it is less so when growth is the concern. The QE2 rally was largely due to better macro data, which coincidentally started right after Bernanke hinted at QE2.

If macro data stays weak, they expect any ‘Pavlovian’ QE3 rally to last hours or days, not weeks or months. The bull case for a tradable rally is one of simple observation that prior central bank action has coincided with important market turning points but the more skeptical MS strategists suspect this more correlation than causation as they point to the muted effect monetary policy has in an extended deleveraging to stimulate activity.

brent bankosky

It all comes down to the FED today. If they extend operation Twist through September and talk about keeping interest rates low through 2015, the market will hold up to some extent. If the FED decides to expand their balance sheet through purchasing mortgages and extends Twist, the markets will rally. If the FED just talks dovish and keeps interest rates low through 2015, the markets will take a big fall.

I think that the most likely scenario is that the FED remains vigilant keeping interest rates low, but Twist has not really helped so no need to extend that now. They will hold their ammo for a real need for QE3. If they do QE3 now and the markets fall further in July/August/September, the FED will essentially be out of ammo and the public will be angry going into the election.

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Written by Gary