Ripple Effect of Stimulus Globally

Fed worries return as the FOMC meeting begins day one. The impact to the US markets has been noticed relative to the increase in volatility and the building negative sentiment over the last two weeks. The global markets have been grappling with this longer, relative to what may transpire. The impact has been a drift lower in Europe, Asia and interest sensitive sectors as well, such as bonds, real estate, utilities and master limited partnerships. Tomorrow we will get the latest and greatest from the Federal Reserve. What they do and say will have an impact both domestically and internationally.

The S&P 500 index is holding the 1775 level of support as the index fell 0.25% on the day to 1781. As expected, the index didn’t have much hope if rising further today in view of the FOMC two day meeting. It fell slightly, but now looks for some enlightenment from Bernanke and the twelve dwarfs tomorrow afternoon.

China (FXI) has been a concern relative to the flag pattern on the gap higher in mid November. I am not a believer in the China story and each report saying things are improving have not rang true with the what is taking place globally. Thus, last weeks break lower and test of the previous move higher was almost expected. The selling has continued in light of the worries in the US relative to stimulus cuts. Why would cuts in US stimulus impact a country that is doing well economically? It shouldn’t, thus the move of late shows the weakness within the country data points or reality versus fiction. This is worth watching as well with the downside in play currently, FXP is the short China ETF.

Is Europe forecasting what will happen in the US if the Fed chooses to cut stimulus? IEV, ishares Europe ETF broke the first support level at $44.95 last week. The majority of European indexes are in confirmed trend shifts. They have established lower lows after breaking support off the recent highs. Is Europe leading what may happen in the US indexes, and if the Fed does cut stimulus at the meeting tomorrow, we could see the US markets follow the global weakness lower. VXUS, Vanguard Total International Stock ETF has broken the June – October trendline and established a lower low putting the next support at $49.50 going forward. As stated above 1775 is the key level to watch for the S&P 500 index. There are short ETFs for the downside play in Europe (EPV) should the downside continue, as well as the Pacific Rim (EWV and FXP) and Emerging Markets (EEV). If the downtrend develops take what the market gives, but manage the risk of any trades.

What is happening in the housing sector? Some believe the worst is over, and the rally in home builder stocks the last year, is just the beginning. I for one am not convinced that is true. Looking at the chart of XHB or ITB the advance in prices stalled in May and traded sideways to down since. Why? Simply put, that is when the Fed started the stimulus cut discussion. Thus, what the market is worried about relative to stock prices, the housing sector is worried about relative to affordability as interest rates rise. Thus, the big challenge for investors lies more in the longer term impact than the immediate. There will be an update relative to the housing data tomorrow with the starts and permits being reported and existing home sales are due on Thursday. The recent move higher in the ten-year Treasury bond had slowed sales initially, but they have rebounded of late. There are plenty of issues facing the housing market like property taxes rising, household income declining nearly 10% over the last four years, affordability, and demographic shifts just to name a few. This is still a sector to watch going forward, especially if stimulus cuts pushes interest rates higher near term.

I am not a big fan of watching and speculating on data points, but Wall Street is focused on the outcome of the FOMC meeting and how the Fed treats the current stimulus package in place. I look for a knee jerk reaction to being with and then the market to settle and the trend to be established going forward. Patience is the key for all asset classes.