Trading on Fed News

02/10/2013 6:00 am EST

Focus: TRADING

Rob Hanna

Co-Founder, Investiquant

Rob Hanna explains how he monitors the Fed action to find good trading opportunities.

My guest today is Rob Hanna and we’re talking about monitoring the Fed and how their activity affects trading decisions, so Rob, we’re talking about QE3 here and more easing.  What are you doing here and how does it affect your decisions in the market?

Well, there are really two big factors that determine whether the market’s going to go up or not.  One is how badly people want to put money to work in the market and the other is how much money is there out there and the Fed controls the amount of how much money is there out there so it’s a big component of whether the market is going to see a rise over the short and intermediate term.  If they’re pumping liquidity into the economy, that liquidity finds its way into the stock market generally so what you’ll see is that there tends to be strong wind at the market’s back and you’ll see strong rises.  This has been seen over many years.  QE1, the first quantitative easing, saw a sharp rise in the market, and then QE2, the same thing.  Now QE3’s a little bit different because it’s not the same size as QE1 and QE2. 

It’s unlimited.  According to them, we’re going to have unlimited QE3, right?

It can go on forever but the problem is, the amount of infusion that’s going on, say a monthly basis, if you measure it out and how much they’re putting in is less than QE1 and QE2, alright?  So liquidity is almost like a drug to the market and it needs more and more to get the same buzz, so QE3 may not have the same effect that the other two have had.  Still, we’re better off having a liquidity infusion from a market standpoint than not having it or having the Fed pull liquidity away.  The last time the Fed really pulled liquidity away was in 2008 and we know what happened then.

And it seems that it helped when they announced QE3 that it would be unlimited or forever that it didn’t have a short-term effect on the market but very quickly, it went away and it seems to have been muted and maybe that’s what you’re talking about in terms of having to put more and more in each time.

Yeah, yeah, I think people got real excited hearing that.  It’s going to have this, you don’t know how big it’s going to be, you don’t know how long it’s going to last, they’re going to be pumping and overall, that’s good for the market.  Is it good for the economy?  That’s debatable.  Are they going to get the same affect that they’re hoping to in the economy?  I don’t know but I do know that it should help the market some.  If it doesn’t, if we start to get a real market turndown, then watch out because people will think alright, they’re trying to prop up the market and it’s not working. 

That could even have a worse effect, right?

Right.  So from a psychological standpoint, if traders believe they’re trying, “they” are trying to prop it up and it still can’t rise, that could put a real scare into people. 

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