Bernanke speaks, but the bond market is reading something differently. TLT was trading at $113.30 when the policy statement was released, fell to $112.40 following the statement and $111.70 after Bernanke’s press conference. The move was a result of the yield on the 30 year bond moving from 3.34% to 3.42% or 8 basis points. The ten year bond was at 2.21% and rose to 2.33% or 12 basis points and more than 14 basis points from last nights close. The spike in yields didn’t help stock prices as they fell slightly following the meeting. In my notes last night I stated that the bond market would tell us what it believes relative to the Fed’s action today. We will have to see how it unfolds going forward, but today it believes the Fed will start tapering asset purchases sooner than later. If rates spike higher it will be a negative influence on stock prices as well as bond prices. The downside play in bonds remains a key part of our strategy near term.
The side effect of the interest rate response to the Fed today was the decline in interest sensitive assets. Utilities fell 2.3%, Dividend stock ETF DVY fell 1.8%, REIT ETF IYR was off 3% and corporate bond ETF LQD fell 1.5% in response to the Fed’s announcement and Bernanke’s press conference. That is not the response I was hoping for from the markets, but it shows the lack of confidence in the economic picture without the stimulus money going forward. Thus, we head into tomorrows trading day with the cloud of interest rates and the Fed’s in ability to talk investors in off the ledge. The downside is on the table… and we will have to see how it plays out going forward.
If we put this all together we have to be very cautious going forward. The reaction today was the scenario we laid out relative a no confidence vote by investors. If they believed in what the Fed was attempting to do looking forward, interest rates would have remained at the 3.2% level and stocks would have rallied following the news. We cannot make assumptions that sleep will not help investors digest what the Fed Chairman said and cooler heads prevail into the trading day tomorrow. Thus, our morning notes will address this further and we will update our positions, stops and watch list based on how this starts to unfold.
Take it one day at a time and maintain your discipline. It is times like these that emotions tend to get the best of us and we react versus act in accordance with our strategy.