There are some interesting developments that will be playing out in the market this week. While there is a multitude of economic data coming out only two things are in main focus for this week. Numero uno is the Greek vote of confidence scheduled on Tuesday at 5:00pm est. A vote of confidence will support the euro and equities as this should lead to the necessary austerity cuts demanded for a bailout of Greece. Thus a failure on the vote of confidence will likely have the euro falling and equities breaking major support. Numero dos is the FOMC meeting on Wednesday at 2:30 pm est all eyes will be on Bernanke on whether there will be a QE3 and/or extended low interest rate language in the statement. In my common sense based approach I like to assemble various scenarios regarding possible outcomes.
· Greek Vote of Confidence Passes/ QE3 Launches
· Probability is low
· Extremely Bullish market reaction
· Long risk
· Greek Vote of Confidence Passes/Fed keeps interest rates low and Balance Sheet stable
· Probability High
· Believe market has priced in this possibility, market reaction would be sideways to upward depending on headline news out of Europe and economic data
· No Vote of Confidence/ Fed keep’s interest rates low and Balance Sheet stable
· Moderate Likelihood
· Market will bleed lower with respect to headline news from the Eurozone.
· Close long, risk based position. Take short term downside bets and prepare for reversal when/if Eurozone crisis is resolved.
· No vote of confidence/Fed “tightens”
· Low Probability
· Market takes a big dump
· Close risk based trades buy LOTS of puts.
Overall my pick is scenario 2 of course I would love Scenario 1 to occur because it presents the most brainlessly simple trade just go long any risk based asset and you will make money, do it with leverage and you can turn that lots of money reference into fortunes. However I would be surprised if the fed flat out surprises and does a QE3, it’s not Bernanke’s style and it’s more likely to be put in place towards the summers end in the august meeting.