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Rumors of QE3 Spark Rally: Dave's Daily

More than $25 billion in POMO was added to markets over the last week. Cash at Primary Dealers was piling up. As markets were becoming short-term oversold it was time to deploy it and seek alpha (buy stocks). There wasn't any seriously positive news to spark a rally unless you believe high energy prices are good for consumers. But, some permabulls got the rumor going that more QE is coming since economic data has been terrible. Completing a string of poor reports, Durable Goods Orders (-3.5% vs -2% expected and +4.4% previously) let bulls know there won't be any interest rate hikes any time soon. Further given all these reports, next week's ISM Index should be quite poor.

The only shred of good news was Boeing (BA - Get Report) stated they'll be on schedule to deliver the often delayed 787 Dreamliner in the 3 rd quarter. This allowed other price heavy weights to charge higher for the price-weighted Dow Jones Industrial Average along with Exxon Mobil (XOM), Caterpillar (CAT - Get Report) and United Technologies (UTX) and a few others. This pushed XLI (SPDR Industrial Sector ETF) higher.

Bulls quickly sold more defensive sectors (XLP and XLV) as the risk switch was again flipped to "on".

You'd think higher energy prices would discourage consumer (XLY, SPDR Consumer Discretionary ETF) and retail (XRT, SPDR Retail ETF) sectors but no, they rallied higher. But, upon closer inspection investors should view and would be surprised by the top component weightings for each of these indexes. XLY's top weights include: MCD, DIS, AMZN, CMCSA, HD & F.  XRT's top weights include: BKS, GME, ANF & SFLY. None of these are what you might expect.

Once again volume on rally days was ultra-light while breadth per the WSJ was positive reducing some short-term overbought conditions.

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