News… Are There Any Trades?

This is the week of news from the housing sector. On Monday the home builders index jumped to 52 (above 50 is favorable) versus the 45 expected, and the largest gain since 2002. Conditions are good as home prices rise due to a tighter inventory of homes. However, today the housing starts were disappointing at 914,000 versus the 953,000 expected. The short fall brings to light what we have discussed several times… cost of materials, labor and interest rates are going up and putting pressure on the builders to start construction of more homes. Permits fell 3.1% as well. Is this bad news or delayed good news? As with all things it is a matter of perspective. For patient investors the news remains positive and the upside of XHB, SPDR Homebuilders ETF is positive with a twelve month time horizon. This remains a sector that I would prefer to own the whole versus the parts as the risk is spread versus determine who will be the eventual winner in the space.

G8 meeting concluded today without much in terms of market altering news. The one thing that was worthy of note was the pressure being applied to the EU to bring union to the banking throughout the European Union. That in turn put some pressure on the banking sector. IEV, iShares Europe 350 Index ETF did move slightly above the resistance at the $42 level. It has held support above the 50 day moving average and for now is happy to track along with the US markets. This is setting up for a possible upside trading opportunity short term. Japan also received some advice from the leaders to develop a credible medium-term fiscal plan. I find that interesting considering those offering the advice are not exactly exemplary partners. I think it is worth watching both IEV and EWJ as trading opportunity in the coming weeks and months. If the FOMC meeting concludes with peace all around, the upside should take hold for now.

Fed making waves and they haven’t said anything… but the speculation is building. There is no word on what the result of the FOMC meeting will be, but the speculation is in every headline. The tapering, stemming, stopping or whatever other buzzword you would like to use for the $85 billion monthly stimulus called QE infinity, is making investors nervous. The ‘leaked rumor’ last week has put some confidence back into the markets that it will not happen now. However, what Mr. Bernanke says will determine the outcome of the emotions towards this topic. Thus, patience is the best course of action on this topic. If you think the Fed will do the right thing and the markets go higher… how much and for how long? If you think the Fed will blow it and rattle investors confidence the short side of the market is priced cheaply today. The best plan is to hear what is said, let it settle in and then follow the trend of the market. Attempting to be right on this type of trade is a dangerous game.

Is the Bernanke confidence being priced into the market too soon and too much? Equally important is the question relative to the interest rate direction, up or down? The broad index bounced off support at the 1598 mark and has pushed back to 1652. Too much, relative to what? We were at 1670 when the nervousness over the Fed pushed stocks lower. To bounce back on anticipation that nothing will change relative to the Fed isn’t overdone, assuming the Fed follows through according to expectations. Bond yields will tell what investors really think. If they resume higher, they don’t believe the Fed. If they check here and move lower to even, they believe the Fed for now. If they fall back near 1.9% on the ten year, they really believe the Fed will stay in the QE business. The play on the news is to be long stocks and bonds if the Fed wins over the confidence of the investors going forward. Otherwise look for more of the same with mixed volatility as the uncertainty works itself out.

The news isn’t going away anytime soon and there will be trading opportunities as a result. That said, you have to be disciplined in your approach and strategy to manage any trades resulting from the Fed activity as well as the economic data. Take what the markets give with a disciplined approach.