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The Bank Of Japan Delivers On More QE.

As I expected, last night, the Bank of Japan expanded its quantitative easing program by ¥11 trillion yen ($138 billion) to ¥66 trillion yen. The cumulative size of the Japanese monetary stimulus program is now a staggering ¥66 trillion, or $825 billion. Virtually everyone in the hedge fund universe expected this desperate move to prompt the collapse of the Japanese yen (NYSEARCA:FXY), possibly as far as ¥85 to the greenback (NYSEARCA:UUP).

What did the yen do instead? It rose modestly from the pre-announcement ¥80 to ¥79.35. Market commentators said demand for the yen as a refuge asset increased as Hurricane Sandy ravaged the American Northeast coast. There were also concerns that the next reports out of Europe may show its sovereign debt crisis is further damping growth.

If this were the first time that a currency disappointed on a fundamental move this year, I would not be so disappointed. But this has been going on all year. Most expected a complete collapse of the dollar against everything in the wake of Ben Bernanke's announcement of his own QE3. Instead, the buck has strengthened.

We traders are left to work with the greatest "buy the rumor and sell the news" market of all time. This has frustrated currency traders to no end. This is why hedge funds have lost gobs of money trading the Euro this year, almost entirely from the short side. This is also why I have confined my own trading to the Japanese yen for the past six months.

This is a classic sign of a market where hedge funds are the dominant players. The price drivers become not the fundamentals, but hedge fund positioning. Whatever hedge funds are doing, you need to do the opposite. Damn the fundamentals! It almost makes doing research for endless hours a week pointless.

The yen still has plenty of reasons to weaken. Just yesterday, September industrial production showed a head-spinning 4.1% loss. As tsunami stimulus runs out, GDP growth has shrunk from a 5% annual rate to under 1%. For more depth, please read "The Fat Lady is Singing for the Japanese Yen" by clicking here.

The new cash will be used to buy assets such as government bonds, real estate investment trusts and stock funds. Four economists saw it increasing purchases by as much as ¥20 trillion yen, when leverage is taken into account.

My friends at the BOJ don't expect to get even close to their 1% inflation target in the period through March 2015. Japan's consumer prices, excluding fresh food, will rise 0.4% in the year starting April next year and 0.8% in fiscal 2014, after subtracting the effect of a planned sales-tax increase, the central bank said in a statement today.

Fortunately, I foresaw the potential disappointment. I did not bet the ranch with a big, leveraged position in the futures market, or with at-the-money put options. Instead, I carried a deep in-the-money put spread which allows me to reach my maximum profit point, even if the yen rises all the way to ¥78.80. Unless you have a short volatility element to your positions this year, such as through employing options strategies, you haven't a chance of making money.

I may want to take profits on this position on Monday to duck the election risk, which could be scary. That's if the markets reopen by then.