Mapping the Apex

The calendar is set up such that we should have some interesting markets in the beginning of November.  The midterm elections are on November 2, and the much awaited QE2 announcement at the FOMC meeting on November 3.  Don't forget the always reliable Mutual Fund Monday combination with the first day of the month could set up an explosive final "all-in" rally on November 1 that should mark a short term top.

Here is how things are setting up.  First, with high expectations for a Republican victory in the midterm elections and the belief that will be a positive for the stock market, optimism will be at an apex.  The problem is that the Republicans will be in favor of less government spending and less stimulus, which is a negative for the stock market.  And winning the midterm elections is no guarantee of extending the Bush tax cuts.

No one will want to be short ahead of the midterm elections and the FOMC meeting where Banana Ben could light fireworks to the market with a QE2 announcement for $1 trillion.  I never like to bet the under with BB's liquidity gun.  Odds are we're more likely to get a $1 trillion asset purchase than $500 billion, which is what many are expecting.  However, going into the FOMC meeting, there will be almost no short base.  That doesn't mean we enter a bear market but the pullback after the meeting can be very sharp and quick.

We should see the ES top and the dollar bottom at the apex.  The cascade of selling not seen since May is very much a possibility.  This rally is at a mature stage and is ripe for a healthy down move.  Seasonality is usually positive for November, but that always takes a back seat to the charts, fundamentals, and sentiment. 

In the meantime, the market has something to look forward to and we shouldn't have more than a 2% pullback till the time comes for all this good news to arrive in November.