General markets gapped down then climbed their way higher as quantitative easing kicked in, closing near the top of their trading ranges. Still, markets ended down on higher volume, chalking up another distribution day. The reason for the gap down at the open was a weak unemployment report. Payrolls declined much less than expected, and the unemployment rate fell a tick to 7.6% from 7.7%, the lowest level since December 2007, but the decline was due to 496,000 workers dropping out of the labor force. Indeed, the participation rate which is the number of working-age people who have or want a job, fell to 63.3%, marking the lowest level since spring 1979. The poor unemployment report should have taken down the market yet it managed to rally after gapping down because quantitative easing puts a floor under the market. So the stock market continues higher on this basis while the real figures say otherwise, but the rebound was not all that surprising given that most broken-down leaders had already been selling off for several days hence were someone played out to the downside, at least in the short term.
QE across worldwide central banks is running at full steam. The Bank of Japan’s move to start injecting $78 billion worth of yen into its financial system on a monthly basis is just shy of the Fed’s own $85 billion per month program on a nominal basis, but in relation to a much smaller Japanese economy this is a massive amount of Japanese QE. Thus it is no wonder to us that the Japanese stock market is enjoying a strong uptrend. The US market could find an accelerated uptrend at some point, though currently QE3 seems to be lagging earlier forms of QE as witnessed by the lower sloping uptrend on the NASDAQ Composite. That said, as more and more money gets printed, currencies will inevitably devalue and hard assets including stocks will rise. Should inflation start to run rampant, stock markets, as history has shown, could start to rise in a parabolic manner. One would hope central banks would slow QE to prevent this from happening, as the aftermath of such a stock market bubble is always catastrophic.
Still, it would be advisable to keep stops tight as both the Market Direction Model and UVXY volatility model remain in cash at the present time.