Ben, You’ve Been Called

After what seems like an eternity, we’ve finally arrived at the big day the markets have been waiting for.  At 2:15 EDT, we will finally learn what, if anything, the Federal Reserve has in store for the U.S. economy and provide investors with a little more clarity on the monetary policy front.  With the mid-term elections now out of the way and largely in line with expectations, Fed action is the last and likely most important remaining wildcard overhanging financial markets.  To be sure, this announcement will likely result in a highly volatile trade for the remainder of today’s session that could spill into the remainder of the week as well.  But if history is any guide, all major markets will provide a verdict on the perceived success/failure of any policy scheme in fairly short order.  As such, I’ll remain skeptical of any moves in the marketplace for at least the next few sessions as investors cast their ballots of approval and disapproval. 

One particularly telling development during yesterday’s trading was the relative lack of strength in gold prices.  While up $3.40/oz. (0.25%) during the session, the fact that the rally wasn’t more sizable given the U.S. Dollar’s sharp move lower was very telling in my opinion.  I’ve noted many times on this blog that gold and the Dollar don’t always exhibit the perfect negative correlation that would normally be expected.   This makes yesterday’s completely plausible.  However, the near certain nature of additional monetary stimulus coupled with the negative comments from Bill Gross suggesting a 20% decline in the greenback is looming did little to move gold prices higher on the day.  These are hugely bullish developments for the gold market.  The fact that a more significant rise couldn’t be mounted is yet another sign, in my opinion, that a significant gold correction is imminent.  I wouldn’t be surprised to see gold trade higher shortly after the FOMC press release, but my read is that any strength will be short lived and worth selling into unless the stimulus package proves larger than an immediate $700 billion injection.

Again, this morning’s trade should be pretty quiet across the board as everyone waits for Ben & Co.  It’s worth noting, though, that both the U.S. Dollar Index and Treasury bonds are seeing fairly strong bids this morning.  While this strength, especially on the Dollar side, could just be a bit of a relief rally after the recent spate of selling, it appears that QE2 concerns are rising.  Whether or not these concerns are warranted will be seen soon enough.  One other thing worth noting has been the drop in volume over the past week or so in the equity markets.  As you can seen in the chart below, much of the recent melt up in share prices has been accompanied by a reduction in broad participation.  To be sure, this suggests that equity prices are currently sitting on shaky ground and built for disappointment if any announced policy measures don’t live up to expectations.  Risk, as I’ve said before, is clearly on the downside.  This doesn’t mean prices can’t move higher, but it does cause me to wonder why anyone would be adding to long positions at this point in time.

Until later…..