Will Helicopter Ben Continue Fueling the Bulls Breakout Effort?

U.S. stock indexes take another “Bernanke Bounce” on hope for more monetary easing coming from the Federal Reserve meeting Wednesday.

Major U.S. stock indexes vaulted to highs for the month on the hopes that Dr. Bernanke and his Federal Reserve will engage in some form of additional quantitative easing at the end of their meeting on Wednesday.

The Dow Jones Industrial Average (NYSEARCA:DIA) jumped 0.75%, the Nasdaq Composite (NYSEARCA:QQQ) gained 1.2%, the S&P 500 (NYSEARCA:SPY) added 0.98% and the Russell 2000 (NYSEARCA:IWM) led the way higher with a gain of 1.8%.

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The stock market activity brought major indexes back above their 50 day moving averages and into serious resistance at levels last seen in early May near the beginning of the recent decline. On a technical basis, some important hurdles have been cleared but more upwards action is necessary to confirm that this is a real uptrend and not a reaction rally from oversold conditions.

Most importantly, one must recognize that the recent rally has been entirely fueled by hope and rumors that the Federal Reserve will, in fact, do something dramatic at the conclusion of its meeting tomorrow.  But gold and bonds aren’t buying the euphoria, and VIX futures contracts point to expectations of VIX climbing +60% by January which would indicate expectations of commensurately lower equity prices.

Gold (NYSEARCA:GLD) today was more than a little subdued, losing 0.49% and Treasury Bonds (NYSEARCA:IEF) were relatively quiet with a drop of 0.46% in the U.S. Bond Index.  A new round of quantitative easing being priced into the market would tend to support the price of gold and elicit a stronger reaction from the bond market and so these players seem to be expecting, at most, an extension of Operation Twist, the Fed’s program of rolling over shorter dated maturities for longer term notes.

Other options are full blown asset purchases, known as Quantitative Easing, or a statement extending the period of low interest rates farther into the future.

Meanwhile in Europe, the chaos continues.  Greek politicians have yet to form a new government and are already hatching plans, it seems, to get relief from previously agreed to austerity terms which is sure to cause heartburn in Berlin.

The G-20 continues its attempts to grapple with the rapidly expanding debt crisis.  Now that the G-20 meeting in Mexico ended with little more than renewed commitments, the stage will turn to the next EU summit set for next week.  The latest plan appears to be to allow the European Financial Stability Facility (EFSF) and the European Stability Mechanism (NYSE:ESM) to buy bonds of troubled nations like Spain and Italy.

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This sounds good on paper, however, the ESM doesn’t exist yet, has yet to be ratified by Germany and Italy, and will have about 500 Billion Euros, if it can get that much, as early estimates are that it will start with approximately 200 Billion real Eurodollars.  The EFSF has 250 Billion Euros which will cover the recapitalization of Spain’s banks but won’t leave much for sovereign rescues.  The only solution here can come from the European Central Bank and that solution hasn’t been reached yet.

Meanwhile at the G-20 meeting, British Prime Minister David Cameron got into a spat with the French over President Hollande’s plans to tax the wealthy, saying that Britain would roll out the red carpet for French wealthy people seeking shelter from the new Socialist government’s policies.

Bottom line: Never a dull moment as we head into “Fed Day.”  The first announcement is scheduled for 12:30 p.m. Eastern time with Dr. Bernanke’s press conference to follow at 2:15 pm. Expect high drama as the world watches to see if the “Bernanke Bounce” can be sustained.

John Nyaradi is the author of The ETF Investing Premium Newsletter.