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Stocks After the End of QE2

Some time this morning, the New York Federal Reserve will buy $4 billion to $5 billion in Treasuries, completing its $600 billion purchase program.

What does it mean to the markets now that the Fed will no longer be pumping about $15 billion a week into the economy?

The markets appear unconcerned...the S&P 500 is up over 3 percent this week, but remember we are not just ending QE2, we are ending the quarter, so it's possible that the usual "window dressing" may be a factor.

The larger question is whether the biggest—and most profitable—QE2 trade is now dead. The "short dollar/long commodities/long commodity stocks" has made a lot of money for traders in the past ten months. Energy stocks are up 44 percent and materials are up 31 percent, but it is no longer working. The dollar lows coincided with the peak of the markets at the end of April. The S&P 500 is down 1.4 percent for the quarter, but cyclical stocks are down nearly 4 percent; oil stocks are down nearly 7 percent this quarter.

You can spin this positively: fading commodity prices ease cost pressures on US consumers and corporations. A strengthening dollar pulls overseas money—especially European money—into US equity markets, with financials initially leading the way.

So that trade appears to be unwinding, but plenty think it may not be completely dead and are poised to jump back in. Short-term, the Fed’s getting out of the printing game is dollar bullish. But many believe that the Fed still will keep rates near zero, and its balance sheet will not shrink.

The big issue, many traders tell me, is that the U.S. economy is slowing down just as QE2 is ending.

But look at how stocks are reacting: The market is bidding up hope. Traders’ commentary has a familiar refrain: the VIX is so low because intervention of all sorts appears to be at hand: interest rates, crude oil (SPR release), EU bailouts, etc. It's not really a new normal, one trader remarked to me—it's more of a “No Normal”, i.e., any large problem meets the hand of government.

Equity portfolio turnover is very slow. Bond volumes are low. The new “No Normal.”

Elsewhere:

1) Will the Dow finish the quarter with a gain? That may hinge on the June Chicago PMI data released at 9:45am ET today. The Dow is just 58 points shy of ending Q2 with a gain today. A Q2 gain would be the Dow's fourth straight quarterly gain. Meanwhile, the S&P and Nasdaq are doing slightly worse this quarter, down 1.4 percent and 1.5 percent, respectively.

And thank goodness June is just about over! Living up to recent trends, this month has been the market's worst month of the year: Dow down 2.5%, S&P down 2.8%, Nasdaq down 3.3%. Including this year's June swoon, the Dow has been down in each June of the last 7 years. And there has been nowhere to hide—each of the 10 S&P sectors is down this month.

2) Callaway Golf announced its CEO George Fellows is resigning for “personal reasons.” He will be succeeded on an interim basis by its Audit Committee Chair Tony Thornley. Additionally, the golf equipment maker also warned it is expecting Q2 revenues of $270 million, well below Street estimates of $309 million, and outlined plans to cut an unspecified number of jobs across the firm.

Speaking of layoffs, the U.K.'s Lloyds Banking jumped 8 percent after announcing plans to cut 15,000 jobs and reduce its international operations. The restructuring will help the bank save $2.4 billion a year starting in 2014.

3) Rite Aid reported a 1.8 percent rise in June same-store sales. Pharmacy sales rose 1.9 percent in the quarter, while general merchandise comps saw a 1.5 percent increase.
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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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