'QE Hype' and 'QE Fatigue' Tug of War Continues

NEW YORK (TheStreet) -- How the markets react to this morning's payroll data today will determine the status of key weekly closes.

With Mitt Romney winning the first presidential debate on Wednesday, a weaker-than-expected employment report should help him rise in the polls. A stronger-than-expected report should give President Obama a boost, as he will surely tout the slow but steady improvement in the labor market.

Some traders attributed Thursday's stock market strength as a victory rally for Romney. I have a cautious attitude toward that notion as the republican presidential candidate is against the Fed's quantitative easing initiatives.

Remember that one of Romney's campaign pledges is to replace Ben Bernanke as Fed Chairman. That means the "extended period" for the zero to 0.25% federal funds rate will likely end in early 2014 and the new Fed Chief will likely begin unwinding the quantitative easing programs. Look for that change after the inauguration.

As the markets react and trade today, the weekly closes will determine whether or not "QE hype" will push markets above their QE highs set Sept. 14. Markets rallied in anticipation of QE 3. The rally stalled two days after the FOMC statement on Sept. 12. Without new highs I am looking for additional sectors and groups of stocks to succumb to "QE fatigue."

Three weeks ago Dow transports caught QE fatigue. Two weeks ago it was semiconductors, the SOX. This week I discussed the risk of QE fatigue in three sectors; industrial products, oils-energy and basic industries in these stories.

Oct. 1: Industrial Products Stocks May Catch QE Fatigue

Oct. 2: Will the Oils-Energy Sector Catch QE Fatigue?

Oct. 4: The Basic Industries Sector Has Not Maintained QE Hype

Third quarter earnings season begins next week with Alcoa ( AA) reporting after the close next Tuesday. On Wednesday the key reports are from Costco ( COST) and Google ( GOOG). Thursday's reports include Bank of the Ozarks ( OZRK) and trucker JB Hunt ( JBHT). On Friday, the key report comes from Wells Fargo ( WFC). I will handicap these names on Monday.

This morning we show that 49.7% of all stocks are undervalued with 50.3% overvalued. Thirteen of 16 sectors are overvalued led by medical 17.1%, construction 15.5%, retail-wholesale 14.6%, consumer staples 13.5%, finance 13.4% and utilities by 13.2.%.

Analysis of the Yield on the 10-Year Treasury Note (1.672): The key level to watch is my new monthly pivot at 1.681%. Trading around this pivot keeps a trading range in-tact between my semiannual value level at 1.853% and my annual risky level at 1.389%.

Analysis of Comex Gold ($1,792.7): The weekly chart for gold remains positive and extremely overbought with the five-week modified moving average at $1,713.2. My semiannual, monthly and annual value levels are $1,702.5, $1,643.3, $1,606.0 and $1,575.8 with new quarterly risky levels at $1,844.9 and $1,881.4. The Materials Select Sector SPDR Fund ( XLB) ($37.02) has a neutral weekly chart profile with declining momentum if today's close is above its five-week modified moving average at $36.68. Weak industries in the basic materials sector such as mining -- nonferrous, chemical -- diversified, agriculture products, fertilizers and steel producers are offsetting strength in gold.

Analysis of Nymex Crude Oil ($91.61): The weekly chart for crude oil stays negative on a close today below the five-week modified moving average at $93.77, but my new monthly pivot at $91.34 was a stabilizing force this week. The 200-week simple moving average is a major support at $81.74 with annual and quarterly risky levels at $103.58 and $107.31. The Energy Select Sector SPDR Fund ( XLE) ($73.755) has a positive but overbought weekly chart profile with the five-week modified moving average at $72.97 as oils-energy stocks outperform crude oil.

Analysis of the euro vs. the dollar (1.3015): The weekly chart stays positive today with a close above the five-week modified moving average at 1.2728. My monthly value level is 1.2589 with my semiannual pivot at 1.2917 and a quarterly pivot at 1.3048, which was tested at this week's high.

Analysis of the Dow Industrial Average (13,575): The weekly chart remains positive but overbought with the five-week modified moving average at 13,299. My annual value level lags at 12,312 with my monthly pivot at 13,506 and my annual risky level at 14,032. The Sept. 14 QE3 high is 13,653.24. The Industrial Select Sector SPDR Fund ( XLI) ($37.04) has a neutral weekly chart profile with declining momentum if today's close is above its five-week modified moving average at $36.75. The industrial stocks in the Dow Industrial Average are lagging.

Analysis of the Dow Transportation Average (5013): The weekly chart for the Dow transports stays negative on a close today below its five-week modified moving average at 5038. My monthly value level is 4859 with the Sept. 14 QE3 high at 5231.15. Earnings warnings in the transportation sector pushed this average to a post QE 3 low at 4870.74 on Sept. 28, down 6.9%. This was the first warning of QE fatigue. Transports are down 0.1% year to date with industrials up 11.1%.

Analysis of the S&P 500 (1461.40): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 1425.6. My annual value level lags at 1363.2 with monthly and quarterly risky levels at 1468.0 and 1513.3. The Sept. 14 QE3 high is 1474.51.

Analysis of the Nasdaq (3149): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 3090. My annual value level lags at 2698 with monthly, annual and quarterly risky levels at 3210, 3232 and 3295. The Sept. 21 QE3 high is 3196.93.

Analysis of the Russell 2000 (844.65): The weekly chart remains positive but overbought with a close today above the five-week modified moving average at 829.42. My monthly value level is 827.70 with my annual pivot at 836.15 with the Sept. 14 QE3 high at 868.50 and the all time high at 868.57 set on May 2, 2011.

Analysis of the Semiconductor Index (383.65): The weekly chart stays negative on a close today below the five-week modified moving average at 392.72. My semiannual value level is 326.30 with a monthly pivot at 385.39 and the Sept. 14 high at 410.82. The SOX is the second victim of QE fatigue ending Thursday 6.6% below its QE3 reaction high.

If the positive and overbought indices, Dow industrials, S&P 500, Nasdaq and Russell 2000 set new post QE3 highs following Friday's employment data, such could be a cure for QE fatigue. Otherwise we are setup for potential third quarter earnings misses or lowered guidance as QE fatigue trumps QE hype.

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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