The Fed and Apple Guiding Stocks

The Fed’s meeting and Apple’s iPhone 5 announcement are two forces that could keep a lift in stocks this week, or let them down hard.

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Apple’s long awaited iPhone 5 is expected to be unveiled at a media event in San Francisco at 1 p.m. ET Wednesday. Apple is such a major factor in the stock market that traders say the quick “thumbs up” or “thumbs down” on the product and the presentation could be big for the market.

The Fed starts its two-day meeting Wednesday and will conclude with a 12:30 p.m. ET statement Thursday. The Fed then releases its economic forecasts at 2 p.m. Thursday, followed by a press briefing by Fed Chairman Ben Bernanke. Sentiment about the Fed meeting has changed quickly, and it is now expected by many market participants that the Fed could launch a new quantitative easing program as early this week, a view that increased after last Friday’s dismal jobs report showed just 96,000 nonfarm payrolls added in August.

There is also a key decision Wednesday from a German court on the constitutionality of Europe’s ESM, or bailout fund, which is widely expected to be upheld. “The only disappointment would be some series of limitations. If they actually were to turn it down, it would be a global event,” said Art Cashin, director of floor operations at UBS.

But the focus after that in the U.S. Wednesday will be on Apple, and how the company handles the product launch without its dynamic, late founder Steve Jobs.

“It may be tough for them to live up to expectations,” said Cashin. “Every phone they bring out is a miracle, then there’s going to be presentational problems because Steve isn’t there. There is a risk there will be an unusual amount of naysaying, not because the product is bad.”

“If Apple were to get hurt, it’s hard to see the market hang in with a falling Apple,” he said.

Apple’s iPhone is being launched this month amid a flurry of smart phone announcements, by Nokia , HTC , Motorola and Samsung, but it is expected to be the mightiest. J.P. Morgan chief U.S. economist Michael Feroli wrote in a note Monday that the iPhone 5 could add 0.25 to 0.5 points to fourth quarter annualized GDP growth. J.P. Morgan equity analysts expect eight million iPhone 5s to be sold in the fourth quarter, even as the earlier version iPhone 4s continues to be sold. Feroli sees that potentially adding $3.2 billion to fourth quarter GDP.

“Apple’s huge and they affect everything,” said Randy Frederick, Charles Schwab director of trading and derivatives. “When Apple moves big, we see big S and P (500) moves.”

Frederick said he was surprised stocks were up so much Tuesday, and he had expected a more sideways trade ahead of the Fed’s meeting. “Someone out there has a stronger reason to believe QE is coming,” said Fredericks. “…If we don’t get it, the market’s probably going to sell off because if there’s any reason for the rally, it has to be that.” The Dow was up 69 at 13,323, and the S&P 500 was up 4 at 1433.

Fed watchers expect QE, or quantitative easing, to possibly be an open-ended program this time around, with smaller monthly purchases of assets by the Fed. The Fed is expected to buy a blend of mortgages and Treasurys, and some expect it to end its Operation Twist program, where it sells the same amount of shorter duration Treasurys it buys at the longer end of the curve.

“There are some skeptics like me who think they might give a half a loaf, extend the low rates guidance to 2015, and maybe offer to do more,” said Cashin, adding he’s not sure the Fed chairman has enough votes on the FOMC to get a new QE package.

Wells Fargo Advisors equity strategist Scott Wren expects this week to usher in a wave of volatility, after the string of major events. He also pointed to the Netherlands election this week, being watched because there is concern that anti-euro and anti-austerity candidates could win.

“Investors will get a glimpse of how the market will respond to disappointment and/or confirmation of expectations. But whatever the outcome, our advice is to fasten your seatbelts and get ready for a volatile ride that could last the rest of the year,” wrote Wren in a note Tuesday.

Options on the VIX, the CBOE’s volatility index, set a new single-day volume record Tuesday with more than 1.2 million contracts traded.

Besides watching Apple and gaming the Fed, investors will be watching import prices at 8:30 a.m. and wholesale trade at 10 a.m. There is also the U.S. Department of Agriculture’s 8:30 a.m. ET WASDE update on the crop outlook.

The Treasury also auctions $21 billion in 10-year notes at 1 p.m.

Follow Patti Domm on Twitter: @pattidomm

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