GOP Victory & QE 2 Fail to Lift Stocks

Wednesday, November 3, 2010
Stock Market Commentary:

Stocks ended with modest gains, oil rallied, while gold and the US dollar fell after the GOP emerged victorious in Tuesday’s elections and the Fed announced $600 billion in QE II. Volume patterns remain healthy as the major averages are now in their 10th week of their ongoing rally. However, it is important to note that there have been an ominous number of distribution days that have emerged in the popular indexes in recent sessions which suggests caution. On average, market internals remain healthy evidenced by an upward sloping Advance/Decline line and the fact that new 52-week highs continue to easily outnumber new 52-week lows on both exchanges.

GOP Victory & QE 2 Fail to Lift Stocks:

The fact that the major averages did not rally after the GOP won in the mid-term elections and the Fed announced that it would buy $600 billion in long term treasuries (i.e. QE 2) suggests the bulls may be tired here. It is also important to note that the longstanding inverse relationship between the greenback and dollar denominated assets loosened on Wednesday. The Federal Reserve held rates steady (as expected) and announced an additional $600B in purchases of long term treasuries aimed at stimulating the ongoing economic recovery. The move is designed to lower rates on long term treasuries in order to spark demand in so-called “risky” assets (i.e. stocks and commodities). Last year, the Fed announced $1.5 trillion in new purchases (i.e. QE 1) which sent the benchmark S&P 500 soaring a whopping +83% from March 2009-April 2010! Remember, one of the oldest Wall Street axioms is: Do not fight the Fed!

Market Action- Confirmed Rally, Week 10:

Heretofore, the action since this rally was confirmed on the September 1, 2010 follow-through day (FTD) has been strong but the market action has been wide-and-loose which is not a healthy sign. The next level of support for the major averages is their September highs, then their respective 200-day moving average (DMA) lines while the next level of resistance is their respective April highs. We have enjoyed large gains since the September 1st FTD and over the past few weeks, the tape remains somewhat sloppy.  Trade accordingly.

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