LUKE WARM

Today was the day that was going to change the market according to many-think back to Goldman Sachs rosy predictions of multi trillion dollar QE2. After a month or more of speculation regarding QE2, it came in at market expectations pretty much, not enough to excite the bulls into a 200+ point rally and not disappointing enough to send the averages packing. As I said earlier and last night and often, the initial knee jerk reaction is often reversed within a few days, however today's reaction wasn't anything to write home about, I'm not even of the opinion it was knee jerk; it was more or less like any other day. Still I would anticipate that there will be a stronger reaction in the days to come.

In fact, the afternoon rally that took us from the lows of the day seemed to have nothing to do with QE at all, but rather just the market following the dollar again. See the charts below.

So even the rally at the end of the day didn't tell us much about the market's opinion regarding the Fed's QE2 announcement.

On a personal note, I don't see today as a particularly bold move on the part of the Fed, it seemed more like half measures, but I do believe there will be European reprisals should the dollar continue to fall, then the currency wars that we were on the brink of, may actually get under way as Europeans won't standby and watch their exports squashed.

Pimco's #2, El Erian didn't think much of the Fed's QE either. To sum up his comments “QE2 will backfire”.

The long side of the bond market didn't think much of the announcement either as bonds on the long side of the curve were crushed today.

I highlighted some of these charts yesterday, the longer ones were crushed or down and the shorter ones put in a luke warm performance.

I'm guessing it will take a few days for smart money to start making up their minds where they want to be positioned and how they want to be positioned. I didn't see anything today that seemed to tip off the Fed's intentions unless we consider the bond charts from yesterday, but that's speculation on my part.

I think people were looking for a big market reaction today, the lack of a big market reaction suggests one of two things, this event was priced in, or it will be priced in.

I don't need to go on and on about money flows out of mutual funds and other economic data, we all pretty much know where the economy stands. However one possible wild card will be new Congressional oversight of the Fed by Ron Paul as he takes over the position of Chair of the Monetary Policy subcommittee. It's no secret that Ron Paul has been very vocal and very critical of the Fed, in fact it makes me wonder if the election may have tamed down Fed ambitions as they'll be called to task by Ron Paul.

Although last night I said that GLD was set for a downside reversal of the bounce 3C picked up last week, I was very surprised by the depth and the aggressive nature of the selling-the dollar was totally uncorrelated to this sell-off as the normal relationship would have seen Gold up.

FAZ managed to hold support today and I continue to believe that financials are a prime target for short selling. BAC and JPM both bounced a little today as 3C has been suggesting and if they continue a little higher, they'll be in a very high probability/low risk area to short them. There are many, many others as well as ETFs that are worth keeping your eye on and I've already set alerts and watch lists for stocks in the sector.

So in my opinion, it's a wait and see over the next few days to see what reaction the market moves toward.

I'll be adding trades as they set up, there are a lot of great trades out there on both sides-look at the continuation I talked about last night in LLNW which is at a nice profit since it was featured, but the key to these types of trades remains to wait for the fat pitch, the high probability move and as the market dictates the direction of most stocks, a solid market reaction is key to picking out the best looking trades.

The rally that we have seen thus far is on par with the rally we saw from February to April and in many ways it looks a lot alike. In some ways it looks worse and for averages like the Q's, the price appreciation looks better, but as I have pointed out in breadth posts, you can have two rallies that are exactly the same in % gains, but that does not mean that they are at all as strong as each other. Breadth readings on this rally have been horrible. I continue to believe that this rally is going to fail and when that happens we are going to be looking at a situation that looks like this: QE hasn't worked for the economy in bigger size so today's half measure seems like a complete waste of money. Unemployment is not showing any signs of reversing its trend, the banks are very close to being in the same situation they were in during 2007/2008 and the next GDP # to come out will likely continue on the path it has been on since Q3 of 2009-down