Fed Minutes Rock the Boat for Investors

The sellers are starting to gain control of the broad indexes and the question is what happens from here? As described below the indexes are moving to the first levels of support and the first test of the move higher is coming into play. This is where we define what takes place in the short term and how much conviction the buyers have relative to the current levels and the outlook going forward

It is important to remember the media is jumping on the bandwagon of valuation and a pullback for the markets. If they, along with analyst, continue to bang on the overbought story iit will become a self-fulfilling prophecy. There in lies the primary concern from my view. We have to approach this one day at a time and let this unfold. Still looking for the full story to unfold relative to the catalyst on the downside. Valuation is not a strong enough rationale for the investors to jump ship on stocks.

The markets opened higher and held most of the day, but once again it was the late afternoon selling that took the indexes lower. The blame? The Fed minutes… once again the Fed is discussing the slowing or stopping of stimulus. This time the mention of going back to a date to end the program rocked investors. The market isn’t ready for this to end and the thought of it causes concerns. Thus, the catalyst I mentioned above relative to the broad markets looking for a sprint to push the markets lower could very well be this issue.

The global markets were already trading lower, but the move in the US markets only added to the downside this afternoon. EAFE was down led by Europe today. The emerging markets continued the retreat with the minutes pointing to one thing that will not help the sector. The dollar was stronger today with the monetary policy showing a willingness to stop the stimulus which leans towards a stronger dollar. This could shift the trade back to being long the dollar and short the euro for a trade. This is what we discussed last night with Yellen coming into question relative to her stance on stimulus going forward. The story is unfolding.

This puts more on the table than we had yesterday and the outlook could get clearer for a downside catalyst. We have to watch and see how this unfolds.

Trend of the Market:

The trend of the market remain on the upside both short term and long term. The micro term (13 weeks or less) is where investors remain focused currently. Why? The media and analyst feeding the concerns about the current valuation of the market overall versus buyers appetite for risk. The VIX index shows the worry factor as low at this point, but the index has increased relative to the intraday volatility. We have all voiced our concerns about the movement of the market near term, but we have to let it play out versus speculating on direction.

Dow Industrial Index (DIA) – moved flirted with, but remained below the 16,000 level. The Fed minutes pushed the index lower on the day. We have two bars that look like a short term top, but the test to 15,700 is not a correction, just a pullback and reasonable within the current framework as stated yesterday.

S&P 500 Index (SPY) – Hit new high last week, but now looks like a topping formation at this point. Watching to see fi the downside leadership will come from this index. Stops in place on any trades and manage your downside risk in longer term holdings. 1775 support is the level to watch going into tomorrows trading.

NASDAQ Index (QQQ) –  The index has led the downside losing 1.75% for the week thus far. Semiconductors lost 0.5% on the day and led the downside. Internet, software, semiconductors and networking have all contributed their share on the downside. Watch and be aware of the exits and opportunities in this market.

Russell 2000 Small Cap Index (IWM) –  We have established the reversal in leadership this week in the sector. However, the index is holding support at the $109 mark. Giving it room, but watching to see how this plays out going forward. Move below $108.65 would be exit signal on any short term trades.

Sectors of Interest:

Semiconductors (SOXX) made a move below the 50 DMA today. This is a big negative for the index and opens the short play opportunity for traders. Watch to see if that pans out. The ONLY ETF Watch List is address this sector.

Dollar (UUP) if the shift concerning the stimulus outlook is truly in play from the Fed minutes today we have to look at the short euro play against the dollar. Watching to see how the dollar moves tomorrow.

Treasury Bonds (TLT) – If the Fed is going to tighten the challenge is higher yields on bonds. The spike on Wednesday was big on the 30 year bond. 3.9% and a push back to the August highs. TBT is back on the table.

Gold (GLD) we have been saying gold is a short play versus a long play and today shows the issue with the Fed and gold, as well as, the demand for gold.

Commodities (DBC) the stronger dollar and buzz relative to stimulus should be a short term boost to the sector going forward. UNG, UGA & OIL all moved higher on the day. This is worth watching for the trade opportunity… nothing more near term.

Interest sensitive assets on the run again with the Fed minutes. IYR & XLU pushed lower on the news. This is another short opportunity based on the current environment.

What to Watch Tomorrow:

Trading Notes tomorrow morning to set the tone for the trading day. Don’t get them? Send and email to don@jimsnotes.com to find out how to try them free.