The Million Dollar Question: What happens to Stocks Following the QE2 Announcement?

The stock prognosticators are out in full force tonight as I work my way through my various blogrolls and media sources.

There seems to be no consensus.  I have seen calls ranging from a market crash on the FOMC news to a multi-week rally that will take us to 1300 on the S&P.

I liked what Rick Santelli had to say on the Tech Ticker today regarding the announcement:



Here Here Rick.  I couldn't agree more.  My gut tells me that if the Fed comes out with anything less than $500 billion over the next 5 months then stocks are at high risk of tanking.

If the Fed comes out with $500 billion and keeps the door open to more QE easing down the line then I think the market will accept this, and tomorrow could be a nothingburger unless there is an election surprise.

If Ben come out with the guns a blazing and announce $1 trillion or more in easing then I think the currency tanks and stocks could soar or crash depending on how high they go.

If Mr. Bernanke announces something absurd like say a several trillion QE2 then I think the market would sense desperation and sell off along with the currency.  If they come out with $1 trillion I could see this moving stocks sharply higher as the banks get loaded up with a nice chunk of cash for the stock casino.

The Bottom Line:

Let's be honest here.  Trying to predict what will happen tomorrow is almost impossible because the market is being controlled by trading robots not investors.  The market will trade based on opportunities the trading algos can identify. 

Perhaps they go long if they see high short interest on a stock or ETF.  On the flip side sell short another name because of a certain technicals.  Since no positions are held for the long term(most are held for a whopping 11 seconds) the computer doesn't care what the fundamentals of a stock are.

Because of this, I wouldn't be surprised to see more erratic unpredictable trading tomorrow just like we have seen the past several months barring any election shockers.

My eyes are increasingly more interested in the bond market and the currencies because these casino games aren't played as much because the markets are too large to manipulate for an extended period of time. 

Just ask the Bank of Japan how their currency interventions have been working out?  The more they try to intervene in an attempt to lower the Yen, the higher it appreciates in value.  I think they have finally given up at this point.

Regarding the elections, I think if the Republicans win big then it will be a short term positive for stocks.  The perception will be that this will mean lower taxes and a more business friendly government.

I see it a little different.  The Republicans are going to be hell bent on shrinking the deficit because this is what they have promised the American people.  If they don't come thorough they know they are toast in the next elections. 

The polls are clear:  Americans want no more new spending or bailouts!  As a result, you are going to see a lot more austerity policies coming out of Washington if the conservative Republicans win big. 

Think Reaganomics in the early 1980's.  In the medium term this could very well put us at risk of dipping back into a recession because without the government stimulus today we would be in one right now. 

Remember, government spending has replaced about 10% of our GDP spending as seen by this chart from Karl Denninger's Market Ticker :

When the government spigot is turned off, that 10% of GDP growth must be replaced by private sector, and this just isn't gonna happen folks when you look at our current economic fundamentals.

If the private sector cannot replace that 10% of government spending then we will start printing negative GDP numbers once again which is how a recession is defined.

The way I see it:  Happy days are here again tomorrow barring any surprises, but I think the honeymoon will be short lived.

PS

I will be monitoring the elections.  I might be back on with an update later.