QE or Not to QE? Downside Risks Will Outweigh Upside Risks on Wed and Thursday

On the day of the last QE announcement, the SP500 rallied 24 points above the previous days close. Then, it sold off 40 points over the next two trading sessions. For the stock market, whether we get QE or not is not as germane as it will be for the treasury market. However, for equity traders looking to capture a no QE announcement which would carry immediate downside risks, the best way to do so might be with an intraday trailing sell stop to get short. If there is a QE statement, the trick for short term traders will be to get short on Wednesday morning for a 2 day pullback into Thursday. Friday’s economic data is geared to be bullish equities so short sellers can’t be short on Friday. The chart above shows the impact of NFP NFP reports on the SP500 since May 2009. Since December 2009, the jobs report has come in below expectations 6 out of 6 times, yet the SP500 is still priced above the Dec 2009 NFP high. One takeaway is the stock market does quite fine on its own in a poor jobs mkt, same thing as happened in 2003’s jobless recovery. Another important thing to note, the SP500 has not breached the June high at 1129.50 yet. Another thing to note is the double top in June and Aug 2009, as well as Jan 2010. These observations reinforce the idea of a double top at or near 1129 if no QE statement is made. Note also, the Aug 2009 double top led to a 40 point drop over the next two days. The failure to breach a shelf in bear markets could signal bear trend continuation near term and sink the SP500 for far more than 40 points. (But a bear trend continuation signal is not the baseline scenario. Baseline scenarios shifted from bear to bull the week of July 19, when lawmakers extended unemployment benefits and it was leaked that the Irish banks would pass the stress tests). A price breakout above 1129.50 on a QE statement would confirm a trend change from bear to bull. But traders will still be faced with the potential for the SP500 to give back far more than it gains from Monday’s close at 1125.50 between Tuesday-Wed-Thursday. Either way the FOMC statement goes, I think traders should just about count on the potential for a 40 point flush from wherever an intraweek high is set on Tuesday’s FOMC meeting. by John Bougearel, Structural Logic