QE Fatigue Spreads on Weak Earnings

NEW YORK (TheStreet) -- The stock market needs to rally significantly Friday to avoid the spread of "QE Fatigue" to additional equity averages and to ETFs that represent stock market sectors. The cause of this contagion is weaker-than-expected earnings reports as companies miss on the bottom line, or lower forward earnings guidance.

Stocks are not fundamentally cheap. At www.ValuEngine.com we show 11 of 16 sectors are overvalued, six by double-digit percentages: construction by 18.5%, medical by 12.6%, finance by 11.7%, retail-wholesale by 11.6%, consumer staples by 11.3% and utilities by 11%.

On Monday, I profiled six stocks that reported quarterly results on Monday and Tuesday in Earnings, It's All About the Bottom Line. Five of six stocks missed on the revenue line including three Dow components: DuPont ( DD), 3M Company ( MMM) and United Technologies ( UTX).

On Tuesday, I profiled another seven stocks that reported quarterly results Wednesday through Friday in Apple, Amazon Face Tougher Scrutiny Reporting Earnings. Dow components Boeing ( BA) and AT&T ( T) missed on the revenue line, as did Amazon ( AMZN). Apple ( AAPL) missed on earnings, with revenue slightly ahead of expectations.

Analysis of the Yield on the 10-Year Treasury Note (1.828): The weekly chart continues to show risk to higher yields given a close today with the yield above the five-week modified moving average at 1.703%. My quarterly and annual value levels 2.109% and 2.502% with my semiannual pivot at 1.853% and monthly and semiannual risky levels at 1.681% and 1.389%. My semiannual pivot at 1.853% held on Thursday.

Analysis of Comex Gold ($1713.2): The weekly chart for gold will be downgraded to neutral on a close Friday below the five-week MMA at $1731.2. A close below the five-week MMA next week pulls momentum out of overbought territory and results in a negative weekly chart. My semiannual, monthly and annual value levels are $1,643.30, $1,606 and $1,575.80 with my semiannual pivot at $1,702.50, and quarterly risky levels at $1,844.90 and $1,881.40.

Analysis of Nymex Crude Oil ($86.12): The weekly chart for crude oil stays negative on a close Friday below the five-week MMA at $92.16. The 200-week simple moving average is a major support at $82.44 with monthly, annual and quarterly risky levels at $91.34, $103.58 and $107.31. The 200-week SMA has been a magnet since mid-2009.

Analysis of the euro vs. the dollar (1.2936): The weekly chart stays positive Friday with a close above the five-week MMA at 1.2861. My monthly value level is 1.2589 with semiannual and quarterly pivots at 1.2917 and 1.3048.

Analysis of the Dow Industrial Average (13,104): The weekly chart shifts to negative with a close Friday below the five-week MMA at 13,357. My annual value level lags at 12,312 with my monthly pivot at 13,506 and annual and quarterly risky levels at 14,032 and 14,192. The QE3 high is 13,661.87 was set on Oct. 5, and the October 2007 high is 14,198.10. Note that the risky levels are below the 2007 high.

Analysis of the Dow Transportation Average (5035): The weekly chart for the Dow Transports shifts back to neutral on a close Friday above the five-week MMA at 5050. My monthly value level is 4859 with the Sept 14 QE3 high at 5231.15. The all time high at 5627.85 was set on July 7, 2011.

Analysis of the S&P 500 (1413.0): The weekly chart shifts to negative with a close Friday below the five-week MMA at 1432.6. My annual value level is 1363.2 with a monthly pivot at 1468.0, and quarterly and annual risky levels at 1513.3 and 1562.9. The Sept. 14 QE3 high is 1474.51 with the October 2007 high at 1576.09. Note that the risky levels are below the 2007 high.

Analysis of the Nasdaq (2986): The weekly chart stays negative on a close Friday below the five-week MMA at 3073. The Nov 2007 high is 2861.51 with my annual value level at 2698, and monthly, annual and quarterly risky levels at 3210, 3232 and 3295. The Sept. 21 QE3 high is 3196.93.

Analysis of the Russell 2000 (816.82): The weekly chart stays negative with a close Friday below the five-week MMA at 828.73. My semiannual value level is 686.25 with monthly and annual risky levels at 827.70 and 836.15. The Sept. 14 QE3 high is 868.50 with the all time high at 868.57 set on May 2, 2011.

Analysis of the Semiconductor Index or SOX (365.48): The weekly chart stays negative on a close Friday below the five-week MMA at 381.93. The 200-week simple moving average is 356.00 with my monthly risky level at 385.39 and the Sept. 14 high at 410.82.

Sector ETFs that will likely be negative at Friday's close as "QE Fatigue" spreads:

  • Materials Select Sector SPDR ( XLB) ($36.04) shifts to negative on a close Friday below the five-week modified moving average at $36.60.
  • Industrial Select Sector SPDR ( XLI) ($36.29) shifts to negative on a close Friday below the five-week MMA at $36.64.
  • Consumer Discretionary Sector SPDR ( XLY) ($45.77) shifts to negative on a close Friday below the five-week MMA at $46.32.
  • Consumer Staples Sector SPDR ( XLP) ($35.47) stays negative on a close Friday below the five-week MMA at $35.73.
  • Energy Select Sector SPDR ( XLE) ($71.87) shifts to negative on a close Friday below the five-week MMA at $72.82.
  • Technology Select Sector SPDR ( XLK) ($28.94) stays negative on a close Friday below the five-week MMA at $30.02.

    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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