Finding Invest-able Ideas

Is the Fed really going to stop buying Treasury bonds and mortgage backed securities? At 2:05 yesterday afternoon you would have thought that was the case after the FOMC minutes were released. In fact, the big headline on several market websites eluded to that very fact. It isn’t a fact, or I didn’t read that in the minutes. “Several” or two to be exact stated they thought the Fed could stop the Treasury bond purchase program by December 2013. By the way… they are non-votingĀ membersĀ of theĀ committee. I love this kind of rumor or fear related type writing. It was a minor hiccup to the market on Thursday, but now the seed is planted and it will come up at every FOMC meeting going forward. We have to be aware of this issue as it impacts the broad markets.

Look at the chart of TLT, iShares 20+ Yr Treasury Bond ETf below. You can see the drop in bond prices relative to the “News”. The decline broke support at $118.40 and leaves some room for further downside. However, this may very well be a buying opportunity for the bond ETF. Once the emotions are out of the way the buyers will step back in is my view. The primary buyers being the Fed and investors happy with a 3% yield and some potential upside in the bond. It sets up as a nice cash alternative trade on the bond with a reasonable risk/reward.

In December we recommended DXJ, Wisdomtree Hedged Equity ETF on the break from the long term trading range. The yen was starting to decline enough to matter to equity investors and the fund hedged against the yen. The fund hasĀ gainedĀ nicely on the move in Japan, but now begs the question of too much too soon. We have been raising our stop on the position, and continue to manage the risk going forward. However, we are also seeing plenty of buy reports on Japan from analyst. That is another warning sign from my view. I like the outlook for growth in Japan, but the Nikki is up more than 20% over the last six weeks. Taking some profit versus more exposure to risk is the more prudent approach near term, while watching for the opportunity to buy the fund on the pullback.

EWH, iShares Hong Kong Index ETF has been in a solid uptrend since June 2012. The recent move above $19.30 is a continuation breakout on the upside. However, the resistance at $19.70 is the all time high for the fund and a key level to clear going forward. The global and emerging markets have experienced a rise in money flow during the fiscal cliff fights in Washington. Investors are looking for alternative options to the US equity markets. We still have to accept the risk of these markets going forward. The short term move isn’t exactly backed by the fundamental data in the various countries. Manage your risk in these type of trades.

Last, but not least, the VIX index moved off the low on Thursday as the FOMC minutes rattled the peace in the markets over the last three trading days. The index still closed lower at 14.5 in position to test the current lows near 13.7. As I stated in my new years update, expect volatility to remain throughout the year. We are at a point on the index to see some settling in before the next “news” item arises to rattle investor confidence.

We continue to look for sound ideas that are invest-able versus just trading the news. Patience is the key as we go forward.