Fed Pumps More Liquidity With QE3

Just to show how slow the economy is recovering, the federal reserve announced on Thursday the release of QE3 (quantitative easing three).  Under QE3 the government will purchase up to 40 billion dollars of mortgage backed securities per month
I want to focus on how the overall market and some specific commodity related assets have already appreciated this year to date.  Below is a chart of the S&P 500 (SPY).

This ETF is already up 18% for the year.  This chart has the look of some extreme front running the QE3 announcement.  The chart is extremely over bought on the daily chart. 

The chart above is the price of oil / barrel.  Notice that this is the highest price per barrel at 96.25 that a QE program has been initiated.  

Above is a chart of food commodities which include soybeans up 44% year to date, wheat up 41%, and corn up 21%.  Perhaps more QE front running has occurred within this soft commodity sector as well.  

Bottom Line:  Just about all markets have been priced extremely high.  If this was a telegraphed call that many traders have made in front of the QE announcement, than we should get a good pullback from today's prices.  The stock market and some commodity sectors are being priced at extremely high risk levels. Thank you for reading.
 

Market Recap - Wednesday November 16

Today is a perfect example of the kind of stock market we currently have been experiencing.  Today around 3:00 pm stocks started to sell off under heavy volume.  From what I can see the 3:00 pm reversal down was caused by three reasons. The price of oil breaking 102.00 per barrel to the upside, a stronger US Dollar Index, unsolved EU Debt Issues.
First let's take a look at a 5 minute one day chart of the S&P 500 (SPY).  Notice the 3:00 pm sell off on heavy volume.

Below, is a chart of oil breaking out above the 102.00 dollar range.  Expect higher gas at the pump soon.

Bottom Line:  What we have is a very fragile market that has been moving on headline news primarily about what's going on in Europe.  Couple that with high oil, and you have a market ripe for a sell off.  Those who are bullish, are expecting a Santa Claus rally into the new year.  I think the chances of such a rally are diminishing quickly.  The headwind of high oil alone is enough to keep the market from putting in a year end rally. Thank you for stopping by.

Tuesday Update

Today was all about oil and the transportation index selling off.  Oil tends to spike for several reasons such as geopolitical concerns, the US dollar, and speculation are prime drivers that can move the oil market.  The transportation sector is highly impacted by the moves in the oil market.  Below is a chart of the oil index on top and the transportation index below.  As oil has made a new multi year high the transportation index has sold off hard, approximately -8.49% in just a few weeks.

Bottom Line:  Oil has been on a tare, and the transportation index is leading the market lower.  I think the market will be under pressure until the oil market pulls back.  Thank you for reading. 

U.S. Dollar Weakness and the Markets

The dollar rises and falls based on the strength of our economy — and the confidence investors have in its future. With other economies in Asia and South America growing more rapidly and the outlook for the U.S economy slowing, the dollar has been weakening.
What does the dollar decline mean for U.S. consumers, and what happens if the dollar keeps sliding?
Americans buy more stuff from other countries than we sell to them, the weaker dollar raises the net cost for a typical American’s shopping basket. Paying more each year for the same basket of goods is the textbook definition of inflation. So a weak dollar could push U.S. inflation higher and become a tax on the already overburdened consumer.
A weak currency also comes with an important trade benefit. It makes everything based on that currency much cheaper in the global marketplace. That tends to help American companies sell more of their products around the world, which boosts the U.S. economy. That, in turn, should create more jobs. In theory, all that expanded economic activity should help re-strengthen the dollar.
A few dollar based charts have alerted me to what’s really driving the overall market and oil higher. Notice the inverse relationship that the dollar and the overall market have taken on.

The dollar and oil have an inverse relationship.

As economic recovery hopes grow, risk aversion trades will diminish, which could also lead to U.S. dollar weakness and higher inverse markets.  Thank you for reading.