We will look at some of the possible implications of QE3 throughout this commentary but especially in my analysis below.
Stocks had a second banner week with most of the major averages up in between 1.07% (NASDAQ 100) and 2.72% (NY Composite Index) due to the Draghi/Bernanke one-two punch.
Let's look at the charts:
Here's a weekly chart of the Russell 2000 small cap index:
And for a historical perspective here's a chart of the NASDAQ Composite going back 15 years"
A look at the breadth indicators reinforces the bullish tenor of this market:
This is a weekly chart of the percentage of stocks on the New York Stock Exchange trading above their 200 day moving average going back to late 2005. I've outlined the effect on this chart of all the QE's as well as the presently announced stimulus. As you can clearly see, we've penetrated a long term down trend line (green dashed) going back to 2009. I've also highlighted with an orange dashed horizontal line a resistance area that was set in 2007 when stocks made all time highs and was successfully breached for a short while in 2009 but failed in early 2011. We'll need to break thru this level (85%) to confirm the sustainability of a long term rally.
True to our inter market relationships,treasuries sold off this week. Initial reaction from the futures pits in Chicago was disappointment that the bulk of purchases by the Fed would be MBS and not Treasuries but then fears of inevitable inflation seeped into the market:
Here's an update on the chart I posted last week of the iShares Barclays 20+ Year Treasury ETF and we've penetrated all short term Fibonacci support levels and are on our way to the 115 level which is significant intermediate term support. Notice the momentum indicators in the top and bottom panel that are signalling that the ETF is oversold. But that doesn't mean we're necessarily in for a bounce.
Many are stating after two days that the Fed's plan is already backfiring because rates are backing up but it's too early to say that the Fed's intentions have been thwarted. The following chart was not created by me but by Arthur Hill of Stockcharts.com and it shows that the initial reaction in the Treasury market after the announcement of the other easings was a back up in rates:
The question the market has is: the last two easings were in the face of deflationary pressures and terrible economic fundamentals. This time around Fed asset purchases will be open ended and in the face of an improving yet tepid economy. Will inflation start to rear its ugly head? I'll be attempting to provide an answer in my analysis.
Gold had been rallying in anticipation of this latest announcement by the Fed but after Thursday's pop it consolidated in Friday's session (black arrow):
We are short term over bought (top panel) but both momentum indicators below the price chart, especially the ADX indicator (bottom panel), are signalling a powerful rally brewing. When you see that black line in the ADX panel on that kind of trajectory get on board!
Fundamentally, I don't see anything that can stop this rally. Indeed, anything that is on the skyline (Israeli attack on Iran, fiscal cliff, etc.) with the exception of a Greek exit from the EMU, can only fuel this move higher.
Commodities are finally starting to move in anticipation of either stronger economic activity, greater inflationary pressures, or both, depending on which thesis you subscribe to. Here's a weekly chart of "Dr. Copper" that has a PhD in Economics:
Here's the Goldman Sachs Industrial Metals Index which includes metals such as aluminum, copper, and zinc :
And finally, for all my friends who are concerned about food prices and other staples here's a monthly chart of the CRB (Commodity Research Bureau Index) going back to 1998. It's a basket of nineteen commodities comprised of agriculturals, livestock, industrial metals, basic materials and oil:
And here's our beloved Dollar: