QE Fatigue Plagues Transports, May Be Contagious

NEW YORK ( TheStreet) -- It seems like the Federal Reserve is all in with QE3 as this version of money printing is open-ended -- $40 billion a month of purchases of mortgage-backed securities as far as the eye can see. After big gains in gold, crude oil and equities last Thursday and Friday, the U.S. capital markets are feeling what I will call the early stages of "QE Fatigue."

U.S. Treasury yields rose last week after QE3 was announced with the yield on the U.S. Treasury 10-year note rising to 1.894% last Friday. The yield on the U.S. Treasury 30-year bond rose to 3.118% on Monday, which made equities less undervalued and more overvalued.

Comex gold traded as high as $1781.80 on Wednesday shy of my quarterly risky level at $1805.90, after the euro versus the dollar tested 1.3171 on Monday.

Meanwhile, Nymex crude oil traded above $100 per barrel to $100.42 last Friday then by Wednesday was below my monthly value level, now a pivot at $93.30, as weak demand and a huge rise in inventories trumped QE3 speculation and continued Mid-East tensions. My monthly value level became a pivot and was tested pre-market this morning after Thursday's low at $90.66.

In the equity markets, Dow Industrials, S&P 500 and the Nasdaq set new multi-year highs on Friday with the Russell 2000 only .07 away from testing its all time high at 868.57, which was set in May 2011.

Dow Transports traded up into last Friday then reality set in this week. Earnings warnings from FedEx ( FDX) and Norfolk Southern ( NSC) pushed transports back below its 50-day and 200-day simple moving averages. Transports clearly caught "QE Fatigue" upon the realization that the U.S. economy was weakening and that QE3 may not be the correct prescription. Next week we will find out how contagious QE Fatigue becomes.

Higher stock prices and the higher 30-year bond yield made stocks less undervalued and more overvalued. On Monday www.ValueEngine.com showed that 45.7% of all stocks were undervalued versus 81.0% at the June 4 market low. Fifteen of 16 sectors became overvalued; Utilities by 18.5%, Retail-Wholesale by 15.7%, Finance by 15.6%, Medical by 14.9%, Consumer Staples by 14.5%, Construction by 12.5%, and Computer and Technology 11.9%. I covered four of these sectors in my stories this week.

Sept. 17: Utilities Remain Most Overvalued Sector

Sept. 18: Book Profits in Consumer Staples

Sept. 19: Book Profits in Consumer Discretionary Funds

Sept. 20: Book Profits on Medical Stocks

Analysis of the Yield on the 10-Year Treasury Note (1.770): The weekly chart for the U.S. Treasury 10-year still favors a rising trend for yields if today's close is above the five-week modified moving average at 1.683%. Last Friday this yield was as high as 1.894%, but my semiannual and quarterly pivots at 1.853% / 1.869% were magnets. My annual value level is 2.502% with my monthly pivot at 1.645% and semiannual risky level at 1.389%.

Analysis of Comex Gold ($1,770.70): The weekly chart for gold remains positive but overbought with the five-week modified moving average at $1678.70. My semiannual value levels at $1,702.50 and $1,643.3 with my monthly pivot at $1,753.70 and my quarterly risky levels at $1,805.80 and $1,856.60. My monthly pivot at $1,753.70 was tested and held at Tuesday's low.

Analysis of Nymex Crude Oil ($91.87): The weekly chart for crude oil remains positive but overbought with the five-week modified moving average at $94.60, so a close today below $94.60 shifts the weekly chart to neutral. My monthly value level at $93.30 became a pivot and was tested on the rebound premarket this morning. My semiannual value level lags at $76.71 per barrel, which is where crude oil might be without these ridiculous quantitative easing programs. Such would have helped the Main Street economy with significantly lower gasoline prices. My annual and quarterly risky levels are $103.58 and $107.63.

Analysis of the euro vs. the dollar (1.2987): The weekly chart stays positive today with a close above the five-week modified moving average at 1.2633. My semiannual and monthly pivots are 1.2917 and 1.2714 with a quarterly risky level at 1.3215.

Analysis of the Dow Industrial Average (13,597): The weekly chart remains positive but overbought with the five-week modified moving average at 13,194. My annual value level lags at 12,312 with monthly, annual and quarterly risky levels at 13,666, 14,032 and 14,493. A new multi-year closing high was set at 13,596.93 on Thursday after an intra-day high was set on Monday at 13,653.24. This occurred as Transports caught QE Fatigue with a day's decline of 141 points on Thursday. The daily chart below is also positive but overbought.

Chart Courtesy of Thomson/Reuters

Analysis of the Dow Transportation Average (4962): The weekly chart for the Dow Transports shifts to negative on a close today below its five-week modified moving average at 5,118. My semiannual value levels are 4449 and 4129 with monthly and quarterly risky levels at 5279 and 5410. While Industrials set new closing highs this week, Transports are down 254 points since last week's close. This has Dow Theorists scratching their heads. Dow Industrials are trying to force a Dow Theory Buy signal on the back of QE3 speculation, while Dow Transports are reacting to the weakening economy in the real world. This tug of war is amazing as shown on the daily chart for Transports, which is clearly negative. The year-to-date closing low is 4847.73 set on June 4.

Chart Courtesy of Thomson/Reuters

Analysis of the S&P 500 (1460.3): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 1413.1. My annual value level lags at 1363.2 with monthly, quarterly and annual risky levels at 1486.7, 1539.8 and 1562.9. SPX set a new multi-year high at 1474.48 on Monday.

Analysis of the Nadaq (3176): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 3062. My annual value level is 2698 with annual, monthly and quarterly risky levels at 3232, 3340 and 3348. The Nasdaq set a new multi-year high at 3195.67 on Monday.

Analysis of the Russell 2000 (851.51): The weekly chart is now positive but overbought with the five-week modified moving average at 820.92. My annual pivot is 836.15 and my monthly risky level at 864.06. The all-time high remains at 868.57 set on May 2, 2011, was nearly tested on Monday with a high at 868.50.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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