Markets React to Fed Comments on Stimulus Cuts

The markets close lower on worries as Fed talks cuts on stimulus. Mr. Lockhart stated he believed the cuts should be more and sooner essentially sending the markets lower. Why? Jobs report on Friday and the belief the market won’t be able to sustain the upside without the liquidity. Whatever the belief, today investors were willing to cash in their chips and move money to the sidelines or bonds.

Interest rates on US Treasury bonds continue to decline with the 10 year bond now at 2.82%. Last Thursday the yield hit 3.05%. The move is showing a rotation of money into bonds currently. Why? Speculation would have you believe the fear of investors relative to stocks looking forward as the Fed cuts stimulus. This is an area we have been discussing the last two weeks plus as an opportunity to park cash as the market sorts out the economy, earnings and stimulus.

Actionable items of interest today…

China (FXI) bounced off the test of the November lows and attempting to gain on positive economic data. The questions relative to the outlook for the economy and financial/banking system are winning over the positive comments from some analyst. The downside returned today in response to the US markets and sent the index lower by 2%. A break of the new support at the $35.70 mark would be continuation of the downside and something to watch tomorrow. Downside micro trend is in play for now and we would need to see a reversal back above the $38.25 mark to change the that trend.

Gold (GLD) saw money flow pick up again today as the metal moved up 0.6% closing at $121.02 on the ETF. I would look for a move to $124.50 – 126 short term, but to get beyond that we would have to see some shift in outlook relative to the global picture imploding. Trade and nothing more at this point.

Bonds (TLT, IEF) are getting a rotation of money as money exits stocks and finds its way to safety. The reality of the trade is simple, fear prompts money flow to bonds and not Fed comments. Those comments may get investors to consider the impact of those actions on the markets looking forward, but it does not have the same impact that fear creates. The VIX index jumped late in the trading day from 11.8 to 13.5 on the close. That is the first sign of fear we have seen in awhile from investors towards stocks. VXX was up 3.6% on the fear move today.

Bottom line… the market sold on the day, but manged to hold on to the uptrend, but the sellers are still in the wings watching and ready to add to today’s activity if it finds good reason. The outcome of the jobs report to end last week, along with the start of earnings this week will be the near term catalyst for the broad markets indexes. Thus, today’s reaction by investors/traders is a normal course of action. We have to exercise some patience currently and let this play out relative to the trend and momentum. The worries in reference to the economy remain a concern and if that grows the downside will become an issue relative to the short term direction. Keep your stops in place and protect the downside risk of your trades.