Fed Rocks the Rally Boat

Welcome to the Fed’s world. The end of the FOMC meeting today was not much different than others, but because the position of the Fed is changing looking forward relative to the Fed funds rate, the market is getting nervous in anticipation of higher rates going into 2015. Without getting into all of what was stated by the Fed, then the media and analyst response, it created confusion in the markets overall. Stocks moved lower initially, the dollar bounced off the lows, the euro rose and yields moved to 3.66% on the thirty-year bond. That reaction was not dramatic, but the response to Yellen’s comments in the interview were. She stated that in about six months the Fed would start to look at raising the Fed funds rate from zero currently. That validated the confusion and anxiety as to what to expect from the Fed going forward. Time will spell out what impact this has along with clarification from the Fed on the intentions relative to raising rates. Be patient and don’t get caught up in the mania that is the media.

As I stated yesterday, regardless of what I believe to be true about the market, it is what the market does that matters. You can’t argue with the confusion created by the Fed, but you can be cautious about the risk it will create. One step at a time is what we will take looking forward.

Moves worthy of NOTES:

Treasury bonds (TLT) gave up the 1%+ they had gained over the last few days of trading. We had stated in updates last week that the move put the bond at resistance again on the upside and to cautious of what lies ahead. The move to $107 puts us now back near the bottom end of the trading range and support on the bond ETF at $105.50. Worth watching as we move forward. A short trade in the bond is still not out of the question.

S&P 500 index moved held above the 1850 level for now. 1874 did offer some resistance on the day, but it was the Fed news more than a reaction to the resistance. Technology (XLK) remains the leaders as the index was essentially unchanged. Semiconductors remained a leader for the sector with index closing even on the day as well. Networking (IGN) was positive as well for the day and inching back towards the previous highs. Overall mild reaction, but still worth keeping our risk management hat on. 

Healthcare remains a leader as well hitting against some mild resistance on the day. Providers (IHF) was up 1.2% despite the overall market. Drugs (IHE) and biotech (IBB) were lower. Overall still a leading sector, but tomorrow will be of interest how the broad markets unfold after digesting the Fed comments.

Global markets (EFA) respond with a thud to the Fed, down 1.5%. Europe was down 1.5% as well and emerging markets (EEM) were down 2%. So much for the rally. If growth in the US is slowing… what will that mean for the global outlook. China responded lower as well down 1.5%. As a side note Russia was off 3.1% as the lack of confidence over the Ukraine remains.

Volatility index (VIX) spiked to 16 on the FOMC announcement and settled in at 15.1 at the close. We have a new worry now relative to the Fed to replace the worry of Ukraine and Russia. The Fed issue will be short lived as the explanation are given and the markets get comfortable with the outlook or they don’t like it and respond by moving lower.

I discussed in the weekly update on Saturday that the lack of clarity remained an issue and that we would be better off to play golf, tennis, travel, or just about anything other than watch the financial markets. Today is validating that belief for me short term. Selling last week, buying the first two days of this week, and some selling today. The emotions and concerns about what is going to take place going forward in the markets as well as global economics, are one big question mark and investors don’t like uncertainty coupled with a lack of clarity short term. Patience is the number one tool needed for now.