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QE3, Matches, And Dynamite

09/19/12 08:59:43 AM
by Billy Williams

Like a match to dynamite, QE3 is acting as the catalyst to give the market a lift and give you some solid price movement to trade.

Security:   SPX, MLNX
Position:   Buy

The wall of worry that the market had been experiencing along with a tightly contracted price range on the overall market has lifted. The condition had been set so that something dramatic could come along and act as a catalyst, like a match to dynamite, to release the pentup energy in the market. It happened in the form of the Fed announcement that another round of quantitative easing would take place.

The market responded positively and got a huge lift as major institutional investors and retail investors jumped on board the explosive flurry of buying into the equity market, as rates have been projected to stay low up to around mid-2015. The access to cheap money will hopefully stimulate corporations to begin expansion and spur acquisitions along with job growth. See Figure 1.

FIGURE 1: SPX. The market exploded higher as the Fed announced that rates would stay low and that they would begin buying up mortgage-backed securities to stabilize the housing market.
Graphic provided by:
In the stock market, some stocks have pulled back, like MLNX and TITN, that are suffering setbacks. MLNX has tumbled another 8% down to its 50-day simple moving average (SMA). If the 50-day SMA holds, then it could create a bullish setup condition unless the stock falls beyond it, in which case it may begin to form a price base for future consideration of a long entry. TITN missed its second-quarter earnings estimates and revised down its four-year earnings projections, causing investors to look elsewhere for better returns.

One stock that is building up a moderate case for investment is NetSuite (N), a company focused on cloud computing, the latest rage among Wall Street firms (see Figure 2). The company has focused on customer relationship management and ecommerce applications, with the company CEO stating that he didn't feel that the market was saturated and that he foresaw big things coming from this industry.

FIGURE 2: N. NetSuite has been steadily trending higher and shows promise of a good stock to take a long position in if its fundamentals keep improving.
Graphic provided by:
N had first-quarter sales growth of 30% and second-quarter sales growth of 29%, with annual earnings estimates for 2012 at 47% and 2013 annual earnings estimates of 59%. Boasting a composite rating of 99, the highest score possible, and earnings per share (EPS) growth rate of 104%, N has compelling fundamental criteria to catch your attention.

However, the return on equity (ROE) is a paltry 9%, well below the minimum of 17%, and the price action on the daily chart is loose and ugly. N has some growing to do in some key areas, but is worth watching to see if it proves itself a solid growth stock worth taking a position in the pursuit of higher returns.

Over the long term, expect stocks to get a lift and maximize your profits. Be sure to look for emerging stock leaders like N that are diamonds in the rough and are proving themselves fundamentally and technically over time. Meanwhile, look for pullbacks on low volume as stocks take a breather after the big runup from the Fed's announcement and enter as they resume their uptrend.

Eventually, the Fed's money printing will catch up to the gluttony of buying up of mortgage-backed securities, but you can hedge part of your portfolio by going long gold and shorting the dollar. Gold has been price-locked for the last year, but QE3 may help it find its legs and start to trade upward again while the dollar slowly gets devalued by the money printing.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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