QE Fatigue Spreads from Transports to Semiconductors

NEW YORK (TheStreet) -- Whenever a central bank announces a quantitative easing move, stocks have rallied. These rallies are not based upon improving fundamentals but are the result of market speculation.

Over the past two weeks we have seen some weaker than expected economic data and earnings warnings from benchmark companies. This real world information shows traders and investors that global quantitative easing moves are not helping the global economies.

Last week's earnings warnings in the transportation sector from FedEx ( FDX) and Norfolk Southern ( NSC) caused the Dow Transportation average to plunge 305 points last week, a loss of 5.8%.

Last Friday I wrote QE Fatigue Plagues Transports, May Be Contagious and this week QE fatigue spread to Semiconductors, which I wrote about on Tuesday in The SOX May Provide Another Warning.

On Tuesday the PHLX Semiconductor Sector Index broke below its 50-day and 200-day simple moving averages, a key technical warning that QE fatigue spread to the SOX.

Among the warnings of QE fatigue this week was lowered earnings guidance from Caterpillar ( CAT) who drastically cut earnings expectations through 2015.

Thursday morning we learned that the final reading for second quarter GDP was lowered to 1.3% from 1.7% in the prior two estimates, and that durable goods orders fell by an unexpected 13.2% in August, the biggest decline since January 2009.

Stocks ignored this real world data Thursday morning and rebounded on expectation of a QE move out of China. Even so, I predict that QE fatigue is contagious and will spread to other sectors as we begin the fourth quarter next week.

Third quarter earnings season begins in October and I would not be surprised to see companies beat on earnings per share, but miss on the revenue line. I also believe that weaker forward guidance will be a story from a more than normal number of companies throughout the third quarter earnings reports.

Today's weekly closes are important for my proprietary analytics and today's closes are also monthly and quarterly closes. This results in new monthly and quarterly value levels, pivots and risky levels for every market and every stock in the www.ValuEngine.com data bases.

U.S. Treasury yields declined this week from 1.758% at last Friday's close to 1.639% at yesterday's close. The yield on the 30-year bond declined from 2.955% to 2.825%. This improved equity valuations slightly, but ValuEngine still shows more overvalued sectors than undervalued sectors.

This morning we show that 50.7% of all stocks are undervalued with 49.3% overvalued. Twelve of 16 sectors are overvalued -- utilities by 17.9%, medical by 14.9%, consumer staples by 14.5%, finance by 13.4% and retail-wholesale by 12.9%.

Here are the sectors and industries I covered in my stories this week.

Sept. 24: Book Profits on Tech Stocks

Sept. 25: The SOX May Provide Another Warning

Sept. 26: Don't Bank on Bank Stocks, Just Trade Them

Sept. 27: Homebuilders' Valuations Are Extremely Speculative

This week Comex Gold has been consolidating below the Sept. 21 high at $1790.0, shy of my quarterly risky level at $1805.9.

Nymex Crude Oil began the week below its 50-day simple moving average at $93.53 and a close today below $94.26 shifts the weekly chart to negative, which would be another sign of QE fatigue as it spreads into the energy sector. The euro versus the dollar stayed above its 200-day simple moving average at 1.2823.

It was a week of no new highs in the equity markets this week so far. The Dow industrials, S&P 500, the Nasdaq and Russell 2000 will remain positive but overbought on their weekly charts while Dow transports still suffers QE Fatigue with a negative weekly chart.

Analysis of the yield on the 10-year Treasury note. (1.639): The weekly chart for the U.S. Treasury 10-year shifts to neutral on a close today below the five-week modified moving average at 1.697%. My semiannual value level at 1.853% is the high end of the trading range and my semiannual risky level remains at 1.389%.

Analysis of Comex Gold ($1779.8): The weekly chart for gold remains positive but overbought with the five-week modified moving average at $1697.8. My semiannual and annual value levels are $1702.5, $1643.3 and $1575.8 with a quarterly risky level at $1805.8.

Analysis of Nymex Crude Oil ($92.10): The weekly chart for crude oil becomes negative on a close today below the five-week modified moving average at $94.26. My semiannual value level is $76.71 with my annual risky level at $103.58.

Analysis of the euro vs. the dollar (1.2911): The weekly chart stays positive today with a close above the five-week modified moving average at 1.2700. My semiannual pivot remains at 1.2917.

Analysis of the Dow Industrial Average (13,486): The weekly chart remains positive but overbought with the five-week modified moving average at 13,268. My annual value level lags at 12,312 with an annual risky level at 14,032.

Analysis of the Dow Transportation Average (4941): The weekly chart stays negative on a close today below its five-week modified moving average at 5075. My semiannual value levels are 4449 and 4129. A new year to date closing low below the current closing low at 4847.73 set on June 4 would be a Dow Theory Sell Signal. Keep in mind that Dow industrials generated a Dow Theory Buy Signal with a new 2012 closing high at 13,596.93 set on Sept. 20. This tug of war continues.

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 1422.2. My annual value level lags at 1363.2 with annual risky level at 1562.9.

Analysis of the Nasdaq (3137): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 3085. My annual value level is 2698 with my annual risky level at 3232.

Analysis of the Russell 2000 (843.54): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 827.66. My annual pivot remains at 836.15 with the all time at 868.57 set on May 2, 2011.

Analysis of the Semiconductor Index or SOX (385.46): The weekly chart shifts to negative on a close today below the five-week modified moving average at 395.54. My semiannual value level is 326.30 with the Sept. 14 high at 410.82.

It appears that QE fatigue is spreading the SOX as shown on the daily chart below. The chart shows the quick deterioration from the Sept. 14 high at 410.82 then the break of the 50-day and 200-day simple moving averages on Sept. 24 to a low of 372.00 on Sept. 26.

The SOX is still below its 50-day and 200-day simple moving averages at 392.23 and 395.73. The decline from high to low totaled 9.5%, which is a significant divergence given the hype of QE3, and is thus the next symptom of QE fatigue.

Source: Thomson/Reuters

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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