QE2: As Popular as R2-D2

by: David Brown

Finally, an eventful week. We had the mid-term elections last Tuesday, whose outcome surprised hardly anyone, and the FOMC’s announcement on Wednesday of a $600 billion second round of quantitative easing (QE2), which surprised almost everyone in a mostly pleasant way as it is 20% larger than expected. In fact, QE2 seems to be as popular as the lovable robot R2-D2 from the Star Wars films. The market reacted by partying like it’s 1999.

The week’s economic releases, for the most part, were better than expected, and most of the corporate quarterly reports, which are now winding down, were also better than expected. So it was no surprise that the market rose sharply higher last week, and in fact, reached a new two-year high, although it backtracked a bit today, with the S&P 500 closing at 1,223.

Today the market was hampered by a strengthening dollar, which has been quite volatile as one might expect, due to the QE2 announcement. The volatility index (VIX) jumped a bit intraday today after falling most of last week, but finished flat at 18.29 and is still quite low.

Market Stats. The rising market lifted all cap/styles last week, with Small-cap Value at the top, up +5.2% for the week and Mid-cap Growth at the bottom with a solid +3.5% gain. From a sector viewpoint, Basic Industries led the week, up +6.5%, followed by Energy and Finance, each up more than +5%. The laggards were all positive, with Health Care at the very bottom, up +1.2%; Consumer Non-Durables, up +1.9%, and Public Utilities, up +2.2%.

Our forward-looking sector model continues to find strong valuation and the overall best ranking for the Finance Sector, followed by Technology and Health Care. At the bottom of the forward rankings are Consumer Services, Transportation and Consumer Non-Durables.

The Week Ahead. This week’s economic releases are sparse. The weekly initial jobless claims will be released on Wednesday, because of the government holiday on Thursday (it’s not a market holiday). The only other release of interest is Friday’s consumer sentiment report, which may be our first chance to gauge how—from an economic viewpoint—the consumer feels about the elections and QE2.

It’s difficult to forecast market direction from where we now sit. Before we get the consumers’ sentiment on Friday, we have three more days of market response to find out what investors think about these two major events, now that they’ve had time for reflection. The market could, of course, resume the charge that has led to its two-year high, or it could stall, as it did today, and fall backward, as it did in April of this year. We’re simply faced with too many unknowns to have much certainty about market direction, so we recommend strong stocks with good valuations and cash flow, and where possible, hedging with shorts or options.

4 Stock Ideas for This Market

This week, I started with Sabrient’s Hidden Gems preset search on MyStockFinder (http://MyStockFinder.com) to identify Strong Buys in our system that are mostly under-covered by Wall Street analysts. Here are 4 new stock ideas that I found interesting:

Jump Group (NYSE:JMP) – Financials
DDi Corp. (NASDAQ:DDIC) – Technology
China Sky One Medical (OTCPK:CSKI) – Healthcare
China MediaExpress Holdings (OTCPK:CCME) – Consumer Services