On Wednesday investors were closely watching the gains in the S&P and Dow , which were impressively strong – in fact they erased most of Tuesday’s losses.
The action puts a spotlight on the catalysts moving this market and just how potent they are. And of all those factors perhaps none is more influential than the dollar.
Looking back over the past three months the S&P and the dollar have traded in an almost perfect inverse relationship. Again Wednesday, the greenback continued its turn lower with investors returning their focus to expectations the Fed will unveil a second round of quantitative easing.
Are gains in the S&P really a sign of market strength or are advances really just bets that the dollar will fall further on QE2?
Instant Insights with the Fast Money traders
Whenever we see a pullback in the S&P we see buyers step in, explains Joe Terranova. That suggests to me the market has a strong foundation of buying interest.
However, QE2 is certainly key to the direction of the S&P. As a 'tell' I’m watching the info contained in The Beige Book – a survey of regional economic activity – which comes out later on Wednesday. The information contained within it will likely be used as an outline at the next FOMC meeting as they take a hard look at how much easing to implement, he says. I think it will be at least $500 billion.
I’m not as sold on QE as the market is, says Steve Cortes. The dollar may not be heading much lower. I think the real test of dollar weakness is to watch the dollar/euro cross. Although the euro has been hammering against $1.40 it has not gotten above 1.40 in any meaningful way. Keep an eye on the action there.
If we get a better idea of the size of QE2 after the Beige Book info is released, the question becomes whether investors should sell the news, adds Jon Najarian. I'm pretty heartened by action in stocks that were hammered early in the session such as Morgan Stanley that are trading well, he says. Investors seem to be buying stocks aggressively on dips which is bullish.