12/15/10   Is QE2 Backfiring?

Editor’s Corner

Investor Heat Map 12/24/10

Is QE2 Backfiring?

Ron Rowland

The stock market continues its year-end march to higher levels, and 2010 could yet turn out to be a banner year.  As of today’s close, the S&P 500 is up +10.8% year to date, excluding dividends.  Of course this return applies only to people who were holding the index when trading opened last January AND remained fully invested through the year’s thick and thin.  Few real-world investors qualify.

Meanwhile, the Federal Reserve’s Open Market Committee met this week and most people did not even notice.  This fact alone is revealing: when all the Fed can do is give us more of the same, its decisions are not near as newsworthy.  China and Spain were actually the more interesting stories.  In China the inflation rate reached 5.1%, a level at which some analysts thought an interest rate increase would be likely.  They were wrong; Chinese authorities kept rates steady, instead deciding to extend a previously-announced period of higher bank reserve requirements.

As for Spain, bond rating agency Moody’s said it may drop the country’s credit rating another notch.  S&P cut its outlook for Belgium a day earlier, signaling that the sovereign debt crisis may not be limited to the PIIGS countries.  European leaders are scheduled to meet later this week to hammer out a more permanent rescue plan.  The real news is that such a plan is needed at all.
U.S. bond yields are rising swiftly.  The ten-year Treasury is now well above 3.4% after closing out November at just 2.8%.  The impact on supposedly safe government bond funds has been severe.  iShares Barclays 7-10 Year Treasury ETF (IET) has shed -6.8% of its value since early November.  More aggressive funds like Vanguard Extended Duration Treasury (EDV) are already in a bear market; EDV has plunged nearly -24% since late August.  Inflation data released this week offered no reasons to think the Fed will change its quantitative easing plans, so at this point the interest rate trends all point higher – the opposite of what the Fed is trying to accomplish with QE2.


The commodity-oriented Materials and Energy sectors maintained their grip on the top two spots again this week.  Industrials moved ahead of Consumer Discretionary to occupy third place.  Relative strength in the remaining sectors was unchanged, with Technology, Telecom, and Financials holding the middle ground and the defensive trio on the bottom.


The status quo continued in our Style rankings with Small Cap Growth still on top.  Relative strength patterns are apparent across two separate delineations.  First we have an inverse cap-size trend.  Small Caps are ahead of Mid Caps, which in turn are ahead of Large Caps, with Mega Caps on the bottom.  Second, within each size category, Growth is currently favored over value.


North America rules the Global rankings today as Canada and the U.S. are tied for first place.  Japan held onto its third place position and is having a good week.  Latin America slid from 4th to 9th place, primarily due to weakness in Brazil.  Other Latin American nations like Mexico, Chile, and Peru continue to show superior relative strength, but Brazil is big enough to bring down the averages.  Europe and China swapped places at the bottom of the stack with China earning last place honors this 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.

“…the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. “

From FOMC Statement of 12/14/2010


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