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It appears that the dance with QE will continue today. For anyone invested in stocks, this has been a beautiful dance to watch for several years now. It's a bit of a two-step and here's how it works. First, the markets fret over what appears to be economic weakness. This causes stocks to move lower and everybody frets about the global economy slipping back into recession. But then the Fed, the Bank of Japan, the Bank of England, the European Central Bank, and/or the People's Bank of China starts talking about printing money and/or taking steps to stimulate economic growth. Bam, the problem is solved and everybody is dancing again.

In case you are not clear on why QE in Japan helps the U.S. stock market, remember, it's all about global liquidity. When a central bank pumps newly minted cash into the global financial system, that money has to go somewhere. And the bottom line is that over the last few years, an awful lot of it has wound up in the U.S. stock and bond markets.

To be sure, Friday's market was all about the "liquidity trade" as the Bank of Japan surprised/shocked the markets by announcing a 60 percent increase to its QQE (Qualitative and Quantitative Easing) program. Apparently, the BOJ likes to surprise the markets in order to create maximum impact for the firing of their "bazooka."

To review, the BOJ will now be buying 80 billion yen a year (about $730 billion) worth of Japanese government bonds, REITs, and ETFs. Yep, that's right fans, the BOJ isn't even trying to be coy about their real objective here as they are buying equity ETFs and REITs outright.

The thinking is that if you can "inflate" the value of stocks and real estate, the consumer will feel better about their financial situation. And if everyone "feels better" they are more apt to spend money and then do their part to grow the economy.

In Japan, they appear to be pulling out all the stops on this idea. You see, in addition the massive increase in the country's QQE program, Japan's Government Pension fund announced that it will more than double the allocation to Japanese stocks in its portfolios. Going forward, the pension funds will have a target allocation of 25% in stocks, up from 12%. Wow.

iShares Japan - Daily

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The news was greeted with cheers for stock markets around the world. Japan's Nikeii kicked things off with a surge +4.83% on Friday (Japanese markets are closed today for a holiday). Obviously, investors think that some of that freshly minted QE cash is going to wind up in Japan's stock market in the coming year.

S&P 500 - Daily

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The end-of-month joyride to the upside continued around the world as Europe saw big gains and the U.S. stock market indices surged to new record highs on the Dow Jones Industrial Average, the S& 500, and the NASDAQ 100. Oh, and the NASDAQ Composite hit a new cycle high as it continues to close in on the 5,000 level seen back in the spring of 2000.

The QE Dance Continues

This morning, it appears that the QE dance will continue as PMI data out of China and the Eurozone has traders back to gnawing at their fingernails and worrying about economic growth.

In China, the official Purchasing Managers Index (PMI) came in at a five-month low. Although the reading of 50.8 is technically above the all-important 50 level (the demarcation line between economic expansion and contraction), the PMI reading was below the consensus of 51.2 and September's 51.1.

In addition, the New Orders component declined, which, of course is not a harbinger of good things to come. The concern here is that the weak data comes on the back of the government having targeted specific industries with stimulative measures.

Then across the pond, the Eurozone's PMI improved from September's 14-month low. However, the reading of 50.6 was below the September level and the New Orders index fell for a second consecutive month.

The good news is that Germany's PMI moved back above the 50-level to 51.4. This was an improvement from the September read of 49.9, which had caused traders to sit up and take notice of the sudden weakness in the area's biggest and best economy.

The Next Move

The next move in the QE dance is for stocks to pull back as traders worry about the outlook for the global economy. Given that stocks around the globe enjoyed a QE-induced sugar high to end the month, we must recognize that markets are now overbought on a near-term basis and could be susceptible to some selling.

So, will the dance continue? Or will favorable seasonality coupled with performance anxiety cause the fear of missing out (or losing your job) to take over? Remember, hedge funds are badly underperforming this year and Bloomberg is out this morning with an article about how mutual funds are lagging as well.

Thus, the question for the coming sessions is which worry will be the focus? Stay tuned, this ought to be interesting.

Turning To This Morning

The focus of today's markets appears to be back to economic data. Traders have the PMI data from Europe and China to noodle on and there will be PMI data in the U.S. later this morning. In Europe, the concern is that an economic malaise may be setting in. While the PMI data did show some improvement, it was hardly robust. And with China's PMI numbers also coming in on the weak side, the concern is that Europe could be in for a long struggle. Therefore, the next move is likely up to the ECB, which has been "talking up" a QE program for some time but has yet to actually fire its "bazooka." European stocks are lower across the board this morning and U.S. futures are pointing to a slightly lower open.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: Closed
    Hong Kong: -0.34%
    Shanghai: +0.41%
    London: -0.53%
    Germany: -0.58%
    France: -0.55%
    Italy: -1.47%
    Spain: -0.69%

Crude Oil Futures: +$0.34 to $80.88

Gold: +$0.10 at $1171.70

Dollar: higher against the yen, lower vs. euro and pound

10-Year Bond Yield: Currently trading at 2.333%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -1.15
    Dow Jones Industrial Average: -23
    NASDAQ Composite: +0.39

Thought For The Day:

The richest man is not he who has the most, but he who needs the least. - Unknown

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Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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