Hint of "QE2 light" Sparks Profit Taking

The market has been rallying steadily since early September, due in part to the expectations that the Fed was going to announce another round of quantitative easing (QE2), or asset purchases, to keep interest rates low and stimulate the economy.

Last night, an article in the WSJ threw a little cold water on the amount of QE that the Fed might actually announce next week. This weighed on overseas markets early this morning, and also led to selling in the U.S. markets after the open.

It is also leading to a small rally in the dollar, which as I have mentioned lately has an inverse correlation to the overall market. So you have the dollar up, stocks down.

The strong dollar is also weighing on commodities. Oil and gold are both down more than 1% to $81.15 and $1324, respectively. Financials and tech are down the least so far this morning, while most other sectors are down 1% or more.

There were some more good earnings reports last night, and some tech stocks are responding well. F5 Networks (FFIV) reported solid results, and its stock is up +13% today; Illumina (ILMN) had a good report, and the stock is up +7.5%; Broadcom (BRCM) also beat and raised guidance, stock +9.5%. FFIV is actually at a new high, so it looks like the cloud stocks are back in the game.

There was some good economic reports today, but they are being ignored by stock investors. Durable goods came in much stronger than expected (+3.3%), and new homes sales also grew by a larger than expected amount (+6.6%).

The 10-year yield is up again, reaching 2.68%; and the VIX is rising +8.5% today to 22.0, bumping right up against its overhead 50-day average.

Trading comment: This is a perfectly normal pullback, and considering that all of the pullbacks lately have only been 1-2 day affairs, I want to at least do a little buying today or tomorrow. If we wind up getting a deeper pullback, then I would look to make additional buys.

The market could certainly take a pause, especially with the big FOMC meeting next week where the market will be eagerly anticipating what the Fed says about QE2. But beyond that, I still think the market will work its way higher into year-end.

long FFIV, ILMN