The QE2 Has Set Sail: Daily Stock Market and ETF Outlook

 Here’s your  market outlook for Thursday, November 4, 2010

 Instratrader Indicators: 
 
Red Flag: We Expect Lower Prices Ahead 

Daily Technical Sentiment Indicators: Bullish

Short Term Market Condition:  Overbought 

It certainly has been an exciting week so far.   And more still to come with tomorrow’s non-farm payrolls report.

The election went pretty much as forecast with the Republicans regaining the house and nearly taking back the Senate.  The U.S. electorate seems to me to be like a kid with ADHD.  Two years ago we “threw the bums out” and yesterday we brought the same bums back. 

People say gridlock is good.  I would disagree.  We are in the midst of an ongoing global financial crisis and I think visionary leadership would do us more good than gridlock.  Furthermore, as Dr. Bernanke said last summer, “central bankers alone cannot solve the world’s economic problems,” but it seems that he will continue to be flying solo as Congress and the President squabble and the 2012 Presidential Campaign got underway today.

Which brings us to “QE2″ or quantatative easing, part 2.  The widely awaited announcement came in at $600 billion between now and June which was considerably lower than many estimates which ran as high as $1 Trillion or more, but above the $500 billion floated by several economists and Fed members.

My view on this is well known and that is that quantatative easing is unlikely to help the economy in any significant way.  A much larger QE1 failed to spur job growth or meaningful economic growth and so it’s hard to make an argument that the rewards outweigh the risks.  The risks and outcomes of this strategy are completely unknown except for the fact that further devaluation of the dollar won’t make us any friends around the world.

Finally today, and almost unnoticed, problems seem to be flaring in Ireland where bonds tumbled and the yield on their 10 year bond hit record highs and costs to insure Irish debt spiked to record highs, as well.  You can remember back to earlier this year when similar action shook Europe and global markets and so one can only speculate on what the fallout of this will be.  So far the Euro has managed to remain firm, unlike in the spring, but this is just a problem that won’t seem to go away.

On the technical front, markets remain vastly overbought and bullish sentiment is at extreme levels that typically precede significant corrections.  Indexes are overextended above their moving averages to points similar to previous significant corrections and money continues flowing from equities on the part of both retail investors and pension funds.

The Republicans have won and QE 2 has set sail but in spite of all the happy talk and optimism, signficant downside risks remain.

Read more at Wall Street Sector Selector