Since last September when the fed started preparing us for QE2, there is a consensus among a big part of the financial community that QE2 was very positive for stocks and a reasonable amount of people in the financial community believe that QE2 is the primary reason for the current rally that is in place since Sept 2010. In fact, Fed chairman Bernanke himself stated in one of his OP-EDs that one of the benefits of QE2 was increased stock prices.
Therefore, I think we could be setting up for a pretty high probability short trade based on the end of QE2. At this stage the market is looking forward to a good earnings release season. I think as we get through most of the major earnings reports by the end of April the market will focus on the next big event and that will be end of QE2.
I believe many money managers will trim some of their long holdings and many of the active traders might even go net short. I expect the market will have a correction of around 10% starting sometime in the later half of April. Since the market always acts in anticipation, I think this correction will end around the time when QE2 actually ends which is middle of June.
Since I cannot be too sure of the timing and the market has already reached pretty high levels, I have added a small position of SPY JUN 137 puts today morning. This position amounts to 20% of my full position size. I will add more to this trade in the later half of April.