In The Rear View Mirror: “Finally.” That is probably the sentiment of scores of traders and investors all over the world and that sound many of us heard was the sigh of relief from global financial markets after the Federal Reserve did what everyone has been hoping for.

QE3 Arrives

On Thursday, the central bank announced it would purchase $40 billion worth of mortgage-backed securities per month in an effort to stimulate the housing and labor markets. That amounts to the third round of quantitative easing, also known as QE3. The cherry on top of the Fed’s stimulus sundae was the pledge that current interest rates will remain through at least mid-2015. Previous Fed verbiage indicated the central bank would keep rates low through late 2014.

All of that was enough to spark on Thursday buying spree that included a little bit of follow through on Friday. The outcome was predictable. All three major U.S. indexes rallied on the news. The S&P 500 and the Dow Jones Industrial Average both gained more than 2% for the week while the Nasdaq added more than 1.5%.

One sign that now is an excellent time to consider micro-caps, the iShares Russell Microcap Index Index (NYSE: IWC) jumped almost 3%.

The Markets @ 9/14/2012
Index	Close	Weekly	% Change	YTD Change	YTD%
DJIA	13593.37	286.73	2.15%	1375.81	11.26%
NASDAQ	3183.95	47.53	1.52%	578.8	22.22%
S&P 500	1465.77	27.85	1.94%	208.17	16.55%
NYSE Comp	8458.88	215.37	2.61%	981.85	13.13%
NYSE Amex	2468.77	42.6	1.76%	190.43	8.36%
RUS 2000	864.7	22.43	2.66%	123.78	16.71%
RUS MICRO	330.04	9.14	2.85%	54.32	19.70%
VANG INTL	14.90	0.55	3.83%	1.84	14.09%
USX CHINA	4413.86	175.71	4.15%	-115.94	-2.56%
EMERG MKTS	6699.04	280.2	4.37%	693.73	11.55%

Market Report

In economic news, the Commerce Department said U.S. wholesale inventories rose 0.7% in July compared with a 0.2% drop in June. Economists expected a July gain of 0.3%. New claims for jobless benefits rose by 15,000 to 382,000. Economists expected a reading of 370,000 new claims. The less volatile four-week moving average rose by 3,250 to 375,000.

The Labor Department said the producer price index climbed 1.7% last month following a 0.3% increase in July. Economists expected a 1.2% increase. The Labor Department said the consumer price index rose 0.6 last month, meeting economists’ expectations. The increase was the largest in more than three years. The Thomson Reuters/University of Michigan preliminary gauge of September consumer sentiment climbed to 79.2 from 74.3 in August. Economists expected a reading of 74.

Economic Data Mostly Positive

Overall, that is a fairly solid batch of data, excluding the jobless claims number, and with the benefit of a helpful Reserve there is reason to believe the broader market has more upside ahead.

The question is how to play that theme.

Market Rally Continues…DJIA Up 108.6% from Great Recession Low

It has certainly been exciting the last several weeks…with every index we follow showing green numbers again. The Russell 2000 was up 2.66% and the Russell Micro Index gained 2.85% which added to last week’s small cap luster. The Nasdaq gained 1.52% last week and is up over 22% YTD with the Russell Micro right behind at 19.70%, followed by the Russell 2000 at 16.71%.

The big gainers for the past week were the Emerging Markets and China stocks…up 4.37% and 4.15% respectively.

But the big news as far broad market followers are concerned is the 108.6% gain in the Dow Jones Industrial Average from its low of 6516 on 3/9/09 during the depths of the Great Recession. Although the long term implications are yet to be determined, QE1 and 2 have had certain positive effects on the markets…now come QE3. Is there enough horsepower in this round to continue to drive equities upward? Probably, but…here are some keen observations of John Nyaradi, publisher of Wall Street Sector Selector who wrote:

“Bottom line: The question now, of course, is how much is left, particularly with the global economy slowing, the approaching fiscal cliff, a Presidential election and potential escalating difficulties in the Middle East. If QE3 runs the same course as QE2, we can expect double digit gains ahead for U.S. stock markets unless one of these nasty factors knocks QE3 off course.

On the other hand, what makes QE3 different, and potentially much more powerful, is its unlimited nature and that it comes in concert with aggressive action by the European Central Bank.

Where and how this ends in the long term is a complete unknown. Will it lead to recovery or a monstrous asset bubble and potential global financial collapse? These questions will be hotly argued in the weeks ahead and one day we’ll know the answer. However, for today, Bazooka Ben has gone all in, and the old cliche, “don’t fight the Fed,” seems more prudent than ever.

Predictably, gold was up for the fourth week in a row…+$44.35 last week to close at $1,781.85

Look for higher prices ahead…here’s why:

“Gold can get a double boost from monetary-easing policies.

“First, increased liquidity can weaken the US dollar, making dollar-traded metals less expensive to buyers using other currencies.

“Second, central bank efforts to increase the amount of cash in the financial system fuel fears of inflation. These worries can lead investors to transfer their wealth to non-liquid assets, like precious metals.” Nine NewsFinance/MSN

WTI Crude Oil moved back up toward the $100 level this week…plus $2.58 to close the week at $99.00. The US Dollar continued to softened against the Euro (closing at 0.7617 Euros, -0.0185); the 10-year bond closed off this week at $97.813 (-$1.796) and the 30-year bond lost a good bit of ground… -$5.078 to close at $93.422.

The Bottom Line for Stocks

In the financial markets as is the case in life, past performance is no guarantee of future returns. That said, this is the third go round with quantitative easing investors have seen so it is instructive to look back at what asset classes and sectors benefited the most under QE1 and QE2.

Not surprisingly, that means micro-cap investors should focus their attention on natural resources and gold and silver miners along with select energy firms. QE3 should be good for the materials complex at large. If you missed our recent post on National Graphite, click here for a unique way to play the natural resources sector: http://gator3112.temp.domains/~jmcasson/2012/09/10/national-graphite-a-different-kind-of-micro-cap-metals-play/

Beyond those obvious suspects, this would be an excellent time to evaluate some high-quality micro-cap financial services names as that sector is poised for a QE3 lift. We also like the alternative energy sector and are researching one name in particular that shows great promise…stay tuned for more details.

Research and Editorial Staff
MicroCap MarkePlace
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