Will shorts feel safe to re-enter the market after the Fed meets on Thursday?

09/10/2012 6:35 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I think what’s most important isn’t the results of the September 13 meeting of the Federal Reserve’s Open Market Committee, but the market reaction to whatever the Fed proposes.

Here’s the factual order of business for the week: Will the Fed announce a new (third) program of quantitative easing? Or will the U.S. central bank drag out the suspense by saying that it continues to watch the economy with concern and promises to do whatever is necessary to keep it from stalling—but not yet.

As Friday’s reaction to the weak August jobs report—96,000 net jobs created against economists’ projections of 130,000 and a revised 141,000 for July—indicates, expectations that the Fed will act still have the power to move global financial markets. U.S. stocks inched ahead—a 0.41% gain for the Standard & Poor’s 500 Stock Index on Friday on the “bad” news. Investors read the poor jobs report as upping the odds that the Fed would move at its September 13 meeting.

So what happens if the Fed doesn’t move on Thursday? It would be a disappointment, for sure, to some investors but probably only a minor one for the market as a whole. If the Fed doesn’t act, but keeps the promise of acting on the table, I think that will leave investor attitudes pretty much where they are now.

And if the Fed does move? Don’t assume that the results would be a significant multi-day rally. As I argued in my September 7 post http://jubakpicks.com/2012/09/07/central-bank-promises-clearly-still-work-so-give-me-more-promises-this-fall-but-please-no-concrete-actions/ a lot of bearish investors closed short positions in August and early September because they didn’t want to risk getting blindsided by the European Central Bank and the Federal Reserve in early September. Traders who moved from short to neutral are likely to be feeling pretty pleased with themselves right now since they did wind up dodging a good move to the upside.

But if the Fed moves? What then? Certainly these traders could put negative bets back on without the worry that a central bank move was about to crush their positions. And all they have to do is look at the 1437.92 close for the S&P 500 on Friday to start thinking that at that level U.S. stocks are 20 points above their April highs for the year. Maybe shorting the S&P at 1278.04 on June 1 at the index’s 2012 low didn’t look very attractive, but at 1438, I’ll bet shorts are busy doing their risk-reward math and some of them, at least, will be coming up with a very different decision.

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