QE3 Might Have to be the Positive Market Catalyst

Traders have three-point checklists for potential market catalysts right now:

Earnings: The season is off to an uninspired start. Alcoa (NYSE: AA) beat extremely low expectations. However, the company cannot fix low aluminum prices brought on by continued European and Chinese economic concerns.

Better News Coming from Europe: The euro is now stuck near a two-year low against the dollar. The German/Spanish bond spread is near its all-time high.

QE3 Expectations: It remains the not-so-secret hope of the bulls. And it appears to be the most likely positive catalyst of the three.

In a poll Reuters conducted, economists working for the primary dealers that do business with the Fed believe there is a 70% chance of another large-scale quantitative easing round.

A trio of Fed governors also voiced support early this week for new economic stimulus. They join the ranks of Vice Chair Janet Yellen, who had voiced QE3 support prior to the latest Fed meeting on June 19 and 20.

In particular, San Francisco Fed President John Williams wants to bring back repurchases of mortgage-backed securities.

Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans also voiced the need for more quantitative easing to help jump-start the economy.

One potential caveat to QE3 may be its size. The Bank of England was first to announce a new round of quantitative easing last week; it amounted to 50 billion British pounds – less than some had anticipated.

In the U.S., the Fed has already added $2.3 billion to its balance sheet in the first two rounds of QE; it remains to be seen how much more it may be willing to add, and if it will be effective.

The S&P 500's uptrend from the October lows is not broken, and we have not entered bear market territory. Markets have become correlated, although Apple (NASDAQ: AAPL) and a handful of other stocks are showing near-term outperformance.

Yet, the large-cap index continues to face strong downside price resistance around 1370 – a trendline marking the declining series of market highs from April until early July.

A move above that price could help clear the way for continued gains, and government intervention appears to be the most likely of the known potentialities to help get stocks above that mark.

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