Market Front Running QE3 or Something Else?

 | Sep 19, 2011 | 3:00 PM EDT
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Let's all agree on something: the market is always right.

A five-day rally is meaningful, right? After all, markets had not seen such a positive move since late June.  But then, the markets unraveled.  All the problems of Europe are gone now, poof!  Just like magic, with the snap of a finger Greece is now an economic powerhouse while the other PIIGS are as guaranteed as a risk-free bond. One would think the market completely ignored the bad situations around the world and decided to party up.

Yet, for some reason, the ties between news and markets disconnected, or rather shifted. Bad news was treated warmly amid good tidings from across the pond. This has not been the most recent pattern, so something else must be at work.

The Fed is front and center with a two-day meeting scheduled. All eyes will be on the statement and perhaps some clues about future policy. It's widely expected Bernanke and Co. will propose some sort of easing that may stimulate the economy or help job growth. The last two rounds did not help that cause too much. In fact the jobless rate hovers near 9% while job creation is falling. It's debatable that Fed policy can influence corporate action, but it's undeniable that Bernanke would like to keep trying. The uncertainty and tension around the meeting and statement is bound to create some anxiousness and volatility. The earnings picture is slowing down, but there are some big ones on tap. Bed, Bath and Beyond (BBBY) and Oracle (ORCL) are just a couple.

I wonder if there is something else going on here. I get it about the Fed. Sure, some are getting in front of a big move and don't want to be caught off guard like in 2010. But maybe the economic climate is not nearly as bad. Industrial production continues to improve and while Fed regions are weak (Empire, Richmond, Philly) and sentiment weak (Michigan, LEI and investors intelligence) there seem to be some rays of sunshine.

CMI talked positively this week, mergers are active and technology stocks are undergoing a renaissance. Inflation is still a concern, which is why I believe the Fed's future actions may not be full throttle. Economic growth is clearly below trend and acceptance, but I suspect the committee will do the right thing, whatever that may be. "Don't fight the Fed" have been great words to live (and trade) by.

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