The major market indexes all rallied yesterday on higher volume, with the NASDAQ leading the way as it regained its 50-day moving average in what was constructive action led by upside moves, albeith from lower positions within their chart patterns, in several big-stock NASDAQ names, including Apple (AAPL) and Google (GOOG). Interestingly, GOOG flashed a pocket pivot volume signature on a move off of its 10-day moving average, but it found resistance at its 50-day moving average, closing slightly off of its highs for the day. The overall index action was sufficient to trigger a buy signal in the Market Direction Model at a position where the indexes are well extended from their lows of a month ago. However, with the NASDAQ breaking out from a short cup-with-handle type of consolidation of the prior gains off the lows, a logical buy point is in fact achieved with the idea that the 50-day moving average and this breakout point become key areas of support that should be held if this rally is set to gain momentum. This could also provide a quick exit poiint should the rally abruptly fail. Overall the action firms up the case for a continued market rally, which is not unexpected given the favorable seasonality going into the year-end holiday season.
Leadership continues to remain less-than-ebullient, although we have identified a few pocket pivots in stocks like Commvault Systems (CVLT), Polyone (POL), and Valeant Pharmaceuticals (VRX) that have acted reasonably well. This may argue for approaching the market on a stock-by-stock basis, taking smaller initial positions and then allowing the positions to prove themselves without moving too far out on the risk curve.
The two-day meeting of Federal Reserve policy makers ends today and the Fed is expected to reinforce expectations of further monetary stimulus by extending the existing "Operation Twist" bond-buying program that expires at the end of the year with new monthly purchases of $45 billion of Treasury bonds in addition to existing purchases of Mortgage Backed Securities (MBS), bringing the total amount to $85 billion.
Quantitative easing remains alive and well though the U.S. market has not responded as well initially to QE3 as it had to QE1 and QE2. QE in all its forms is a misallocation of money that distorts markets and devalues currencies, driving up asset prices. A high price will ultimately be paid for these devaluations in the dollar, the euro, and the pound, which we believe will ultimately be positive for precious metals and other commodities and potentially spark a new upleg for this asset class at some point.