08/22/12   Fed Signals Intent For QE3

Editor’s Corner
Ron Rowland

The much-dreaded “Fiscal Cliff” inches closer every day.  Everyone knows it is coming and predicts various types of doom. Yet the investors whose collective actions compose “the stock market” seem unconcerned. The S&P 500 is sitting near a four-year high and is on track to post its sixth straight weekly gain.

Investors – professional or otherwise – are certainly capable of wishful thinking, but they are not suicidal.  If the fiscal cliff were as threatening as bears suggest, asset prices would reflect the prospect.  Since they do not, other factors must be more important.

What other factors?  Today’s Federal Reserve minutes suggest the monetary policy makers are losing confidence in the prospects for economic recovery.  “Several” members of the committee “lowered their expectations for economic growth over coming quarters” and think additional monetary accommodation will be needed “fairly soon.”  The Fed is signalling its intent to launch some sort of QE3 in the near future.

Adding two and two together, investors seem to have concluded the Fed has both the ability and the intent to offset whatever damage is done when we reach the fiscal cliff.  This may or may not be the correct conclusion, of course, but it is the consensus for now.

The steady climb in Treasury bond yields of recent weeks reversed today.  Ten-year notes went from below 1.40% a month ago to as high as 1.86% yesterday before reversing to close at 1.72% today.  Precious metals also moved up, particularly platinum, but this is more related to South African labor violence.

As we noted last week, Ben Bernanke’s Jackson Hole speech will be the next big marker ahead of the September 12-13 FOMC meeting.  The Fed is running out of time if it wants to make any major decisions ahead of November’s election.  We hope they enjoy their time in Wyoming.  The rest of the year won’t be near as peaceful.

Investor Heat Map: 8/22/12


Technology grabbed the top sector ranking, completing its five-week climb from last to first in conjunction with new all-time highs in Apple (AAPL).  Such quick ascents naturally create sustainability concerns.  In this case, the gains were gradual enough to allow further upside.  Some short-term resistance will need to be overcome first. Telecom slipped back to second place, followed by Energy.  The #4 Industrials sector moved into the top half of the chart for the first time in months.  Strength in home builders and media stocks put Consumer Discretionary in the fifth-place spot.  The bottom sectors consist of Materials, Financials, and the defensive trio: Consumer Staples, Health Care, and Utilities.  All still show uptrends but have not kept pace with broader market action.


Dispersion is disappearing from the Style rankings.  Last week we saw 20 relative strength points between the strongest and weakest groups.  In only five market days, the spread was cut in half to ten points.  The top four groups are unchanged with Mega Cap still in the lead, followed closely by Large Cap Value and Mid Cap Value.  Either could grab the top position by our next update.  Large Cap Blend rounds out today’s top four.  The #5 position goes to Small Cap Value, a category that was #8 a week ago.  This is significant because all three Value categories are now in the top half of the chart.  Laggards include the three Growth categories, Small Cap Blend, Mid Cap Blend, and Micro Cap.  We still have some nice symmetry with Mega Cap in the lead and Micro Cap on the bottom.


Europe, yes, Europe, is today’s top global category.  We don’t know many people who expect it to stay there for long.  The benchmark we follow – iShares MSCI EMU Index ETF (EZU) – jumped from #4 to first place in the last week.  This follows a 17% gain in the past four weeks, which was certainly impressive, but we are dubious about the prospects for further gains.  Anyone trading Europe is well advised to stay nimble.

Pacific ex-Japan gained momentum but lost relative strength, slipping to second place. Fellow resource-heavy category Canada is right behind at #3.  Canada’s jump from #7 last week was made possible by crude oil trading above $97 today.  The middle of the pack is an actual pack today with World Equity, the U.K., the U.S. and EAFE tightly clustered.  The bottom four still consists of Japan plus the emerging markets trio.  Japan managed to move up from last place, however, as China slipped two notches to the bottom spot.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


[Take a deep breath for this mouthful of a sentence…]

“Furthermore, members generally attached an unusually high level of uncertainty to their assessments of the economic outlook and continued to judge that the risks to economic growth were tilted to the downside because of strains in financial markets stemming from the sovereign debt and banking situation in Europe as well as the potential for a significant slowdown in global economic growth and for a sharper-than-anticipated fiscal contraction in the United States.”

July 31 – August 1, 2012 FOMC minutes


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