Stocks Rally On Elections, QE II & Strong Jobs Data


Friday, November 5, 2010
Stock Market Commentary:

Stocks and commodities soared as the US dollar fell one day after the Federal Reserve announced a second round of quantitative easing. Volume patterns remain healthy as the major averages are now in their 10th week of their ongoing rally.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.

Monday- Wednesday’s Action: Elections & Fed Meeting:

Stocks edged higher on Monday and Tuesday ahead of the mid-term elections. On Wednesday, after the GOP emerged triumphant, stocks edged higher after the Fed concluded its two day meeting. 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!

Thursday & Friday’s Action: Stocks Soar on QE II & Strong Jobs Data:

Stocks soared on Thursday as the USD fell and the world fully embraced QE II. It is important to note that the euro was trading at 139 before the Fed announced QE 2. One day later, it topped 142 which sparked a broad based rally in dollar denominated assets (mainly stocks and commodities). Before Friday’s open, the Labor Department said employers created +151,000 new jobs in October which was more than double Wall Street’s estimates. Meanwhile, the unemployment rate held steady at +9.6%.

Do Not Fight The Fed:

It appears the positive scenario we described earlier in the week is unfolding and all we can say is Do Not Fight The Fed. Embrace it, and remember that all the ingredients that sent the benchmark S&P 500 vaulting 83% since March 2009 are still in play, if not stronger now (an additional $600B will be added to “help” the system). That said, the USD is falling hard and the inverse relationship appears to be back on track. As always, use protective stops but one would be wise to err on the bullish side until any of the major averages decide to pullback (it’s only a question of when, not if).

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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