QE2 Template Doesn't Fit

The last time the Fed went on a bond buying spree, it was November 2010.  The market initially went higher and then had a pullback which was a golden buying opportunity for a monster rally into new highs.  The S&P was at 1180 then.  We were still in an inventory up cycle after the paring down of inventory in 2008-2009.  It is now at 1439.  Valuations are not cheap anymore, in fact, they are expensive considering where we are in the economic cycle.   Unless we get irrational exuberance into stocks, I don't see a continuation of the rally.  I see that as a very low probability event. 

The bond yields, both Treasury and MBS are so low now that only marginal gains will be made with Fed purchases, making monetary stimulus much more limited this time.  So the only catalyst for higher prices is hedge funds chasing the market higher and animal spirits.  Both should be limited.  We have run up a lot ahead of these central bank events, because that is what kept us out of the abyss during the summer.  It is payback time now that the news will finally be released. 

I am sure Ben will not disappoint the market, he never does.  So expect a QE3 bazooka today and euphoria that will lead to a one or two day rally.  And then short term consolidation next week and then a new downtrend.