Stock Market: Are We Breaking To The Upside?

There are not many days to experience the stock market going up, together with Bonds and Notes – and on top of it: Gold makes a new all time high.

What triggered this event?

Yesterday, rumors swirled that the Federal Reserve is considering buying as much as $1 trillion in U.S. bonds to support the economy.

That’s an over dimensional sum of money and such a purchase would have drastic effects on the economy and the overall markets. By making paper holders cash holders, this measure would bring a huge amount of money in the market that afterwards has to get invested somewhere. So where is it gone go and what will happen, let us use easy supply and demand rules:

• the stock market will surge by more money floating that will be put to work,

• the dollar will get weaker, because we have more dollars floating,

• commodities will rise because the dollar is getting weak and we purchase those in USD.

In the last two days, we had a hug increase in Volume of Stock market Indexes and their referring puts and calls, while more calls got issued. Overnight, the bank of Japan intervened to stop the continues rising of the Yen, which makes their exports less attractive. But why does the Yen rise? Because the dollar is on a fall.

Everybody who was waiting for the stock markets t the fall of the cliff better changes position now. From our perspective we will see rising indexes first.

If you are shaking your head in disagreement after reading the last sentence, you are probably someone who believes we are going to see a double dip in the stock market. Your prediction could be right in the long run, but there is no way in the short term such a large bond purchase wouldn’t have these 3 results. The Fed would do this to stimulate the economy and there is no way a trillion dollars wouldn’t succeed, at least temporarily.



Just take a look at what yesterday’s, September 14, 2010 rumors did :

• The dollar traded to lows not seen against the Japanese yen since 1995

• The dollar dropped to parity with the Swiss Franc

• The dollar dropped 1% against the Euro

• Gold hit an all time high of $1,276.50

• Bonds went up in anticipation of a move.

• Japan intervened on the Yen.

Good trading !