There is an old adage on Wall Street, buy the rumor and sell the news.

Simply put, investors will typically buy a stock ahead of expected good news then sell when the news is released to the public as said news is now built into the price. So far during September

Over the past few weeks we have been buffeted with stories of QE2 coming at the November meeting from the Federal Reserve. 3rd Quarter GDP is expected to come in below 2% which would indicate the fledgling expansion is loosing steam.

The Federal Reserve will then prime the pump and add additional measures in order to help boost a lagging recovery and protect the US Dollar, which is in a freefall back to major levels of support lasting more than 20 years.

Some of the rumored measures include buying long-dated Treasuries, additional MBS securities to help the mortgage market, and corporate bonds.

There are a couple of problems lying just underneath the surface. First, corporate profits are coming in above expectations partially due to the weak US Dollar and economic numbers coming out of the US Government, with the exception of the unemployment rate, point to GDP growth above 2%.

Next we have the concept of QE2 itself which has not been defined. Rumors have been running rampant about the size (anywhere from $500 billion to $2 trillion) and scope (Treasuries, corporate bonds, MBS, equities) of QE2.

Should QE2 come in on the light side it is likely the markets sell-off as investors will be disappointed.

If the Fed does not have a specific target in the language investors will be disappointed due to the lack of clarity.

If the initial estimate of 3rd Q GDP comes in above 2%, which is likely with an election only days away and the Democrats staring at heavy losses, the market will sell off as it becomes less likely that we get QE2 from the Fed or at least a smaller QE2 than expected.

Market sentiment numbers are near levels that precede a pullback or correction. Bullish and bearish sentiment numbers from the AAII are at levels that often precede a pullback or correction in the market.

Finally, we have hawkish comments coming from one of the biggest doves on the FOMC, Vice-Chairman Yellen warned that low rates are an incentive to for firms to take more risks and the Federal Reserve has to be ready to take away the “punch bowl”.

Politically, the market is expecting a change in leadership in the House while the Democratic lead in the Senate is severely cut back.

In the days leading up to the release of 3rd Quarter GDP on October 29th, the 2010 mid-term Presidential elections on November 2nd, and a Federal Reserve meeting on November 2nd and 3rd we are likely to see an increase in volatility. The chances that we sell on the news will rise considerably as the expected good news is being priced into the market. Investors would be well served to manage their risks accordingly.

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