Gold Should Rally for QE3

Yesterday’s rally appears to be a mix of relief and short-covering. For instance, I suspect the move for Citi (NYSE:C) was helped along by shorts saying "enough is enough" and covering their downside positions.

You’ll notice that Bank of America (NYSE:BAC) finished in the red, though off its’ early lows. Investors are still bearish on banks.

Other stocks, like Microsoft (NYSE:MSFT) seem to have actually attracted investors looking for good entry prices.

It would be a very positive sign if stocks could put in a continuation day and finish in the green today.

Futures were down in the 1% range this morning, but started rising after the Durable Goods number came out…

What this market needs most is better economic data. QE3 and Obama’s jobs bill can help, but they are really just band-aids for weak economy.

So, the 4% gain in Durable Goods orders for July is a good start. The number was pushed higher by new airplane orders. But even without transportation, orders were up 0.7%, when a decline of 0.6% was expected



Surprisingly, the extremely negative June Durable Goods number was revised higher. You may recall it was this data point that started the selling in late June. And to see an economic data point revised higher is very rare. These numbers usually get revised lower.

Is this Durable Goods number enough to convince investors that maybe the economy isn’t so bad and end the sell-off? I don’t think any single number can turn the market. But we should acknowledge that the sell-off has been weakening.

The outlier low of 1,101 on the S&P 500 notwithstanding, we’ve seen several tests of the 1,120 support zone. It would be reasonable to expect some upside from that level, and all that’s missing is a catalyst.

The financial media is still reporting high hopes that the Fed will save the day by announcing QE3 on Friday. This is a mistake. Not only would QE3 be a bad policy move right now, raising expectations for QE3 sets the stock market up for failure.

Of course, this may be a red herring from the financial media. If expectations for QE3 were truly driving the stock market, then gold wouldn’t be selling off.

My best guess is that the Fed will acknowledge the weak growth and reiterate its pledge that it’s ready to act if the economy deteriorates further. In other words, things aren’t great, but they aren’t bad enough to unleash QE3.

We’ve been having a spirited debate about the U.S. economy and the recent sell-off here at the Wyatt investment Research offices. While we do have a perma-bear or two that see lower prices for the S&P 500, the general consensus is that the economy — and stock prices — will trudge along. Stocks should be added on dips like we’ve had.

The issue for the economy is demand. Clearly, there is little demand from corporations and consumers. With unemployment as high as it is, demand is not increasing from the consumer. Spending is basically steady at current levels, and showing very slight growth. And with little consumer demand, there’s nothing pushing demand from corporations.

We know that the consumer is still grappling with debt, from credit cards to mortgages. It is the corporations that are financially healthy and have record amounts of cash.

The best hope for the economy is that corporations start investing that cash, putting it to work. But how? And what would prompt them to do that?

There has been talk that a tax break for returning profits from overseas would encourage corporations to put money to work. This makes some sense, but it’s not a panacea.