Low QE2 Volume And An Inside Day Point To More Downside

Includes: SH, SLV, SPY, TIP, TLT
by: Chris Ciovacco

The media likes to imply the Fed is on the verge of cranking up QE3. Here is Reuters' take on Wednesday’s Fed statement and press conference:

The Federal Reserve is prepared to take further steps to help an economy that is “close to faltering,” Fed chairman Ben Bernanke said on Tuesday in his bleakest assessment yet of the fragile U.S. recovery.

While QE-friendly ETFs were lifted with the market’s tide on Wednesday, many of them experienced gains on low volume. The table below shows some of the biggest gainers in the wake of QE2, followed by Wednesday’s volume and average daily volume. On Wednesday, big institutions were not buying stocks or the idea the Fed is on the verge of QE3.

As noted on November 2, the ratio of Treasuries (NYSEARCA:TLT) to TIPS (NYSEARCA:TIP) indicates fears of deflation continue to outweigh concerns about imminent inflation, which means the market questions the impact of additional Fed intervention.

As outlined on October 20, bear market rallies often fail near the S&P 500's 200 day moving average. The recent stay above the 200-day only lasted two days. Unless the market can recapture the 200-day soon, the script will have not deviated from a typical bear rally.

An inside day occurs when a market trades within the high and low range of the previous day. The S&P 500 had an inside day on Wednesday. While inside days are not the most reliable signal, they can be followed by a continuation of the previous move. With strong down days on Monday and Tuesday, followed by an inside day, we may see weakness in stocks (NYSEARCA:SPY) on Thursday, which would attract shorts (NYSEARCA:SH) and bond buyers (TLT).

The silver ETF (NYSEARCA:SLV) has yet to recapture its 22-week moving average, which also leans toward deflationary outcomes. More information can be found in this October 20 article.

Disclosure: I am long TLT, UUP, SH.