The Fed, Earnings, Interest Rates and Energy

The FOMC meeting ended with the Fed saying more of the same. The nothing new speech and comments did nothing to reverse the downward trek in stocks on Wednesday. The billions being put to work monthly by the Fed is keeping interest rates low or effectively at zero, but has done very little to stimulate growth in the economy. It has created more of a deflationary type environment than one of inflation which many were worried about when the stimulus started. Based on today’s comments the QE stimulus may be here for quite awhile longer. Employment and economic growth have been a no show over the last couple of months and that has put further pressure on the Fed to provide stimulus. The net take away from this is more money should act as a floor under stocks.

The most talked about stocks after hours was Facebook. They posted better than expected revenue, but missed on earnings. That is the opposite of so many companies during this earnings period. The penny miss was still better than some of the whisper numbers from analyst. The stock was unchanged after-hours, and how it trades today will give more insight into how investors digested the earnings data. This is a long term investment opportunity. If you are not willing to go the distance with Facebook it doesn’t make since short term as the company ramps up spending to commoditize the asset of more than 600 million users daily. That will take time and patience for the investment to pay off relative to ROI. Watch to see if the news has any impact on the technology sector in trading today. IYW is the ETF to watch.

Visa posted better than expected earnings data on Wednesday after-hours. The stock was trading up more than 1.5% on the news which is enough to erase the losses from the trading day. On Wednesday the stock traded lower in sympathy with the missed numbers by MasterCard which fell more than 2% on Wednesday after missing earnings. This validates the challenges in the financial sector of the good and bad earnings period. XLF attempted to move above the $18.60 resistance on Tuesday, but move back below that number on Wednesday closing at $18.49. This is a sector watch going forward for above average growth, but in the short term it still has challenges from the banking sector. Watch XLF to see if it can regain the upside momentum that took the sector higher.

The yield on the both the 10 and 30 year treasury bond fell 4 basis points. That pushed TLT and IEF higher on the day. The significance of the move for TLT is it broke above the recent consolidation to a new near term high and above the $123.40 resistance. As we have discussed the bonds are showing some signs of fear from investors as money rotates to safety. High yield bonds which have been a concern relative to risk as the yield spread to treasury bonds and corporates has continued to fall. The narrow spread is a negative for the bonds and raises the likely move lower in price, which in turn would increase yield. If stocks pullback or correct look for high yield bonds to go along for the ride lower. Fixed income assets in certain areas are showing signs of fatigue and investors should look to raise stops to protect current gains. Watch TLT and IEF and tighten your stops to protect the solid gains off the March lows. Raise your stop on HYG  to protect the upside gains in the sector off February lows.

The energy sector has been a story of winners and losers. The broad sector has struggled overall, but each sub-sector has had a period of growth. Thus, breaking down the parts to play has been better than the whole. From November to March the refining stocks were leading the way higher, but since have traded lower and are consolidating.  The drilling and exploration stocks have been picking up since mid-April along with the services stocks. The long term outlook for the sector is positive, but as an investor we have to do our homework to find the winning stocks or sub-sectors that are moving the broad index higher. XLE will underperform relative to the sub-sectors.

This is still a matter of sentiment going forward for the broad markets. Do investors believe the outlook for growth is picking up? If so, there is opportunity now and going forward. If not, raise stops protect your gains and let this short term volatility or uncertainty work itself out. Now is a good time to be patient and see how this all unfolds. Respect the risk of the market and focus on protection of principle at this point versus chasing returns.