Fed Baby Steps: Dave's Daily

The Fed took a small step toward another round of quantitative easing as the economy stumbles.
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I guess it's how you view things. The Fed took a small step toward another round of quantitative easing as the economy stumbles. Their decision to rollover their maturing mortgage-backed securities into Treasury bonds is an easing gesture. It's no mere bag of shells since, according to Bank of America, it would total $340 billion over a 12-month period. So we're not talking about trillions now but this is just the first volley perhaps in a series of moves if the economy doesn't respond.

Stocks fell sharply early Tuesday as inventory data was negative and worker productivity, the main negative, declined. This means workers are producing less for hours worked which could lead to more layoffs.

After the Fed announcement stocks rallied substantially but never made to green limping to the finish line. And, still this week we have Jobless Claims, Consumer Sentiment and Retail Sales data looming

Once again, we follow these light volume rallies but high volume declines. It's not a good situation since you go along for the ride and then fall into a sinkhole. Most winning sectors today were in defensive sectors like healthcare and consumer staples.

Volume increased substantially from the dreadfully low levels Monday while breadth was negative.

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SPY:

For us anyway, the most important chart for SPY is the last daily chart which shows the heavy blue line which acts as resistance for the last 7 trading sessions. Breaking through this is imperative for bulls. You can see we've tagged it virtually every day but haven't broken through yet. Curiously, or not, weekly charts show a similar issue with resistance levels.

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MDY & IWM:

It's in these major market sectors where damage remained most acute. Further, it's always important to remember these sectors are the most sensitive to economic data.

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QQQQ:

Tech rose more on Monday and declined more on this turnaround.

Continue to U.S. Market Sectors, Selected Stocks & Bonds

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SMH & INTC

: At the heart of tech are semis and we might even call them the "wellsprings of life" for the entire sector. If they're weak, tech's weak.

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FDN, GOOG & AMZN

: I like the structure of FDN and think the index is well-balanced. Things are going along just fine for the leaders.

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XLP & PG:

Defense led the way as investors are uncertain.

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XLV & PFE:

Once again another more defensive sector leading as investors get skittish.

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XLU:

Utilities--another defensive sector with yield.

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DIS & XLY:

Yes Disney is a component of XLY but XRT contains the red meat that comprises what our lil' buddy Chucky is up to shopping wise. In that regard Retail Sales and Consumer Confidence data later this week should prove interesting.

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IEF, TLT, TIP & LQD:

This is getting absurd but it is what it is.

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PFF

: Preferred shares have been popular and yields exceed 6%. They're much overbought and you should be aware they're mostly financial sector names.

Continue to Currency & Commodity Markets

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$USD/DXY, FXE & FXY:

As advertised the dollar will fall with Fed actions even if they're not the full QE2 deal.

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GLD & SLV:

Gold will rise with QE2 as advertised while silver is the poor man's gold for a reason.

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DBC:

Commodities sold-off hard early on grains and energy.

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$WTIC/CRUDE OIL & XLE:

Energy sector worried about poor economic data and slackening of demand even from China.

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DBB & JJC:

Poor economic data may constrict demand.

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XME & FCX:

Miners and those in finished products slowed substantially over economic worries.

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JJG & DBA:

Grains were hard hit today as investors thought the rally had extended too far too fast and inventory realities caught up with traders.

Continue to Overseas & Emerging Markets

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EFA:

European shares were down sharply early but U.S. based ETFs rallied off the lows.

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EEM:

EM's with higher volatility take the downside more.

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EWY:

A lot of negative news in Asia and worries about impending economic data from China spooks markets. The little man in the high heels also tosses a few bombs the south's way.

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EWA:

Down with commodity markets on Tuesday.

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EWZ:

Declines in iron ore and base metals hurt Brazil shares Tuesday.

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EPI:

Some profit-taking Tuesday with general declines throughout Asia.

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FXI:

Plenty of worries about whether China is growing or slowing. We'll learn more Wednesday with fresh data they release.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

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The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.  I believe readings of +1000/-1000 reveal markets as much extended.

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The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Continue to Concluding Remarks

On the one hand Bernanke & Co laid down a marker for future actions the Fed might take. This makes the September meeting, barring a preemptive measure, more interesting. The amount of liquidity being injected some say is just a wash but I'm not smart enough to know since $340 billion or so is a lot of money.

Economic news continues to be bleak. Corporate profits are doing well but it doesn't help when pundits compare 2009 earnings to the same period this year. This makes for misleading reports like Disney up 40% or so from the same period last year. Economic data does affect the future for corporate earnings and are more forward-looking than current earnings. So, it seems some have things backwards.

CSCO's earnings are on tap tomorrow after the close and they'll be much watched. There isn't much economic data until Thursday and Friday.

We've posted a video/podcast interview done Friday with Global X CEO Bruno del Alma regarding the many new unique single-country and sector ETFs. Some of these include such interesting subjects as Brazilian Consumer Discretionary and China Consumer Discretionary issues. These should appeal to long-term investors given their excellent demographics (a young population) which should with growing economies make these sectors in particular important. You may listen and watch at this link

HERE

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Disclaimer: Among other issues the ETF Digest maintains positions in: GLD, DGP, UDN, FXE, EEM, EWZ, EPI and FXI.

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at

www.etfdigest.com

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Dave Fry is founder and publisher of

ETF Digest

, Dave's Daily blog and the best-selling book author of

Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management

, published by Wiley Finance in 2008. A detailed bio is here:

Dave Fry.