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Market Reversing Sept. Trends

Stocks reverse after strong September. Volume picked up a bit in the S&P 500 ETF a short while ago, as the S&P index dropped below 1140, which was the lows of yesterday (this is called an outside reversal day).

What's going on? Several issues:

1) some unwinding of the very successful September reflation trade, so traders are buying the US dollar and selling gold and other commodities;

2) some discussion about asset allocation among pension funds...there was talk earlier in the week about a significant rebalancing from equity to fixed income at the end of the quarter due to the dramatic outperformance of equity to fixed income this month.

3) Tomorrow's ISM index for September is getting an unusual amount of trader discussion as well. The recent regional PMI indices have been mixed: today's Chicago number was stronger than expected, but Philly and New York and Dallas have been below expectations. So traders are looking to see what trend the ISM might confirm.

Why does this matter now? If the ISM is strong, then the Fed may have less need for quantitative easing (QE2). That is not good for gold, and not necessarily good for stocks, since stocks have an unquantifiable "QE2 trade" built in.

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