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Thursday, October 28, 2010

WALL STREET >>> Pre-Fed Anxiety Grips Wall Street

QE2 Rally Hits Speed Bump;
Nasdaq Flies Over The Storm Clouds
Wall Street’s QE2 rally hit a bit of turbulence on Wednesday as the Dow dropped triple digits before recovering amid concerns that the Fed’s plan to boost the economic recovery may not be large enough.

Stocks spiraled lower today, as investors considered the prospect of a milder-than-expected economic intervention by the Federal Reserve. The Wall Street Journal can take most of the credit for raining on the bulls' parade -- this morning, the newspaper reported that Fed officials next week are likely to unveil a plan to buy "a few hundred billion dollars" in government bonds over the course of three months, compared to the central bank's ambitious March 2009 initiative to purchase $1.75 trillion in Treasury and mortgage bonds. The Journal explained that the Fed is simply trying to keep its options open as the economy lurches unsteadily toward recovery, but traders took the news pretty hard. In fact, the market wasn't even encouraged by stronger-than-expected reports on durable goods orders and new home sales, with some viewing the solid data as further indication that the Fed will err on the side of modesty.

The Dow Jones Industrial Average (DJIA – 11,126.28) was off nearly 149 points at its session low, but the blue chip barometer pared the worst of its intraday deficit to close on a loss of 43.2 points, or 0.4%. Only nine of the Dow's 30 components finished higher, led by recent laggards American Express (AXP) and Bank of America (BAC), while McDonald's (MCD) and Merck (MRK) led the 21 decliners into the red. The Dow found support today near the 11,020 neighborhood, which is home to its rising 20-day moving average.

Crude futures fell in sympathy with stocks today, as expectations for a relatively modest stimulus effort from the Fed propped up the U.S. dollar. An unexpected weekly decline in domestic gasoline inventories helped crude oil recover from its intraday nadir of $80.52 per barrel, but the greenback's surge kept the dollar-denominated commodity under pressure through the close. Crude oil for December delivery shed 61 cents, or 0.7%, to end at $81.94 per barrel.

“People have gotten a little bit complacent in terms of expectations for the Fed’s QE2 to be the [cure] to heal all wounds. Traders knew at some point those questions would come up. It was just a question of when.”


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