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State of the Markets: It's Fed day, here's what we're watching…

Although the surprise move by the People’s Bank of China to pump 500 billion yuan (approximately $80 billion) into the country’s top five banks (a move that was the equivalent of a 0.50% cut in the country’s reserve requirement rate) got all the attention yesterday, today is all about Janet Yellen and her merry band of central bankers here in the United States. In short, it’s “Fed Day” again here in the U.S. and traders are likely ready to go.

Speaking of “Fed Days,” Bespoke Investment Group reports that the S&P 500 has averaged a gain of 0.47% on days when the Fed made announcements since ZIRP began in December 2008, which is well ahead of the average gain of 0.35% seen on all Fed days since 1995 (when central bank began publicizing policy changes on meeting days). However, since the Fed began to taper its latest QE program last December, the S&P has averaged a gain of 0.19% and finished higher on four of the last six “Fed Days.”

As a reminder, the FOMC announcement is scheduled for 2:00 pm eastern with Janet Yellen’s Press Conference scheduled to follow at 2:30 pm. When the FOMC statement is released, analysts will be quickly scanning the text for the words “considerable time.” Recall that these two little words have been used by the Fed to describe how long the Fed Funds rate is expected to stay at the current 0% – to 0.25% target. Removal of the phrase would seem to suggest that the Fed is leaning toward raising rates sooner rather than later. The current consensus expectation is for the Fed to begin a long, gradual rate-hike campaign in June 2005.

Analysts will also be paying close attention to the “dot plot” contained in the FOMC statement. This graph shows the projection of where rates will be from each Fed Governor. The expectation is that there will be more “dots” projecting higher rates, sooner than there were at the last FOMC meeting.

Overnight, markets rallied in China on the back of the monetary stimulus efforts of the PBOC. In Europe, the sentiment is upbeat as well. And U.S. futures are sporting a slightly green hue in the early going.

Current Market Outlook

Don’t look now, but the much ballyhooed weakness in the stock market as well as the expectations for a meaningful decline appear to have been, once again, put on the back burner. Yesterday’s triple-digit pop higher took the DJIA to new all-time highs on an intraday basis, a move that was sponsored in large part by the PBOC. The thinking is that China’s stimulus moves will produce economic spillover in the global economy. The bulls were also supported Tuesday by Jon Hilsenrath, the WSJ’s Fed-watcher, as well as PIMCO’s Bill Gross. “Hilsy” opined that the “considerable time language in the Fed statement is likely to stay. And Mr. Gross, aka the bond king, suggested that Yellen will remain cautious in terms of monetary policy because the risk of the “lost decades” seen in Japan is higher than the difficulty some inflation might cause in the near-term. The bottom line is that the “liquidity trade” continues to be the focal point in this market.

Looking At The Charts

The title of Stealers Wheel’s big hit “Stuck in the middle with you” seems to be a fitting description of the current technical picture as yesterday’s move pushed the Dow and S&P 500 back into the trading range that has been in place since late August. However, this remains a tale of two tapes as the charts of the NASDAQ, Smallcaps, and Midcaps continue to sport downtrends. But for now at least, the threat of an imminent correction in the blue chips would appear to have been lessened.

S&P 500 – Daily

Midcap 400 – Daily

See more at StateoftheMarkets.com

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.