10/27/10   QE2 May Be Too Small

Editor’s Corner

Investor Heat Map: 10/27/10QE2 May Be Too Small

Ron Rowland

How big is the QE2?  No, not the ship.  We refer to the forthcoming Quantitative Easing, Act II, which should emerge from the Federal Reserve a week from today.  Everyone wants to know the answer to this (potentially) trillion-dollar question.  Quite possibly no one knows yet, even Ben Bernanke, because the Fed has not yet made a final decision.

For now the prime worry appears to be that QE2 will be too small.  This morning the Wall Street Journal reported forecasts that the stimulus will be “only” a few hundred billion dollars.  While it is certainly not chump change, investors are obviously looking for more.  The U.S. dollar turned up in recent days while domestic stocks and Treasury bonds retreated.  The S&P 500, which touched its highest point in almost six months on Monday, retreated following the WSJ report.  Commodity prices also softened, including gold.  As if this weren’t enough, next week will also bring the U.S. mid-term election and the release of October employment data.  The Seoul G-20 meeting will not be far behind.

In other words, we are entering a period of heavy news flow.  The Fed and the Obama administration are both keenly aware that markets hate to be surprised, so we suspect they are making coordinated leaks in an attempt to gauge market reaction.  On the other hand, they also know that they cannot please everyone.  Someone is going to be disappointed when rumor becomes reality.


Like a broken record, Materials plays on in the Sector rankings top spot.  The uptrend is now approaching resistance created by its January and April peaks, so we won’t be surprised to see Materials lose some momentum soon.  Technology is still in second place and looks poised to make another advance.  Consumer Discretionary jumped to the #3 position on strength in the Leisure and Entertainment segments.  The defensive sectors are still in the bottom half with only Financials sitting lower.


All Style categories showed improvement the past week.  The rankings may look jumbled at first glance, but there are some patterns.  The advantage of Growth over Value is becoming a little clearer.  Small Cap still has an edge over Mid Cap and Large Cap.  We see a few minor shifts from last week, such as Mid Growth moving ahead of Small Value and Micro Cap slipping behind Small Growth, but the margins are small.  The overall impression is of a market that wants to take on risk – an attitude that could change quickly in the next week or two.


Europe held on to the top Global ranking.  International stocks and the Euro both bounced back strongly for a few days after the dollar’s failed rally last week, but the battle is still not over.  China remains in second place for now, though more bad days like today could change the picture quickly.  China’s Yuan dropped against the greenback after the central bank changed its foreign exchange reference point.  The U.S. actually improved a notch even though, along with Canada and Japan, it remains on the bottom of the list.  Japan, Brazil, China and many other countries broke below their lows of last week; if this turns into a trend we could see a major reconfiguration of the rankings as soon as next week.


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.

“It’s the looniest attempt in modern history to apply mercantilist dirigisme on the global level.”

David Goldman of First Things in regards to Geithner’s proposal that industrialized nations limit current-accounts deficits/surpluses to 4% of GDP


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