As a new/novice investor, I would like to better understand the basics of how QE2 works, how it affects market direction, and how it skews/affects the use of CANSLIM principles.
QE is used by central banks to stimulate their economy by printing money which it uses to buy bonds which increases the money supply, which in turn increases the prices of bonds and thus lowers their yield. The effect of QE is that drops in the US stock market since March 2009 have been slight, always contained to a mild 5 to 10% correction before moving higher. The exception is May 2010. This is not surprising since QE ended April 2010, and QE2 did not kick in until some time later. Consequently, we see rallies that lack conviction but nevertheless, the market continues higher. We recently issued a buy signal without a follow through day, the first of its kind, due to the positive action in leading stocks and the continued uptrend in the market.
Keep in mind that even should the model issue a sell signal in the coming days, this is not a normal market environment as the Fed's Quantitative Easing (QE2) fights any downtrend, and William O'Neil's saying to not fight the Fed rings true, so odds are that if the model were to issue a sell signal as it did on 11/16/10, the market could soon find its low and move higher.