It’s late now, but yesterday afternoon I opened a Put on the weekly Dow at 12,900.
Although there was a chance the Fed was going to announce QE3, I am already long various stocks, so thought a hedge would be a good idea. With the ECB due to meet later today and the Nonfarm Payrolls on Friday, there is plenty that could knock the market for six or send it sky high.
The latest instalment from the MoneyWeek Trader helped me into this trade.
Even though I am not certain the next big move will be down (I think it will be up, even if there is a short term correction), this analysis seemed well founded. The price I paid for the option is negligible so my risk /reward ratio feels balanced in my favour.
And then there’s Europe. This Yahoo! Finance Breakout video provides an excellent overview of what the market expects.
I still can’t help shake the feeling that Europe is going to disappoint. Draghi’s comments last week were bland and open to interpretation. They seemed off the cuff and lacked the finesse I would have associated with a genuine plan. The Fed has John Hilsenrath as its friendly journalist through whom they test policy ideas, but the ECB has no-such person to call on.
European governance is chaotic at best. There are too many different interests at work and the idea of a Government of Europe hasn’t settled with the population. Germany and the prosperous North are not prepared to subsidise their profligate southern counterparts, while the stricken PIGS are beyond repair within the existing framework.
The European Financial Stability Facility has already been announced, but this has done little to soothe market fears. The ECB has already provided over €1trillion in the LTRO and has mopped up billions of Euros of questionable bonds. What more can they do?
I will find out soon enough if I am wrong, but I will be surprised if the ECB is actually able to deliver the kind of blockbuster package the Fed has provided since 2008.
If we are to see a serious resumption of the bull market I think it will be up to the Fed to provide the fuel.
QE3 seems a certainty now, but I’ve been saying that for a long time.
If we think back to this time two years ago, when the Fed was about to announce QE2, there is one pattern possibly repeating in their behaviour. Although they didn’t announce a bond purchasing programme today, the Jackson Hole Economic Policy Symposium is around the corner. At the 2010 event Bernanke gave the world QE2.
It may be a reasonably safe bet to expect the same again at the end of the month.