Taper: Handicapping Fed’s Impact
Chris Ciovacco | Dec 16, 2013 04:06PM ET
Last summer, the Fed said they were using three main criteria for reducing their monthly bond buys – economic growth, employment, and inflation. How do things stand relative to these benchmarks?
From The Wall Street JournalQQQ ) continues to provide leadership relative to the broader S&P 500 Index (SPY). All things being equal, that sides with the bullish economic outcome camp.
Cyclical Sectors Trying To Perk Up
The high beta ETF (SPHB) overweights economically sensitive sectors of the economy, such as financials (XLF), consumer discretionary (XLY), energy (XLE), and technology (XLK). As shown in the chart below, high beta stocks are trying to reestablish their leadership relative to the broader S&P 500. The chart below, in its present form, aligns with investor confidence, rather than taper fears.
Defensive Stocks Lagging
When money managers with a fully-invested-all-the-time mandate are nervous, they tend to overweight defensive consumer staples stocks. Their rationale is consumers will all continue to buy toothpaste and groceries, even during an economic downturn. The chart below shows stocks of consumer staples companies are lagging the broader S&P 500 Index, which is indicative of relatively low fear heading into the Fed announcement. The three steps of a bearish trend change recently “confirmed” weakness in defensive staples.
Two Forms Of Indecisiveness
There was a lot of chatter about the “indecisive nature” of Monday morning’s rally in the equity markets, which is not surprising given what lies ahead this week.
The market’s understandably hesitant nature can be seen in the two charts that follow. The flat blue and red moving averages below on the weekly chart of the S&P 500 tell us bullish economic conviction and bearish economic conviction have been fairly evenly matched in recent weeks.
While defensive and deflation-friendly bonds are still in a clear downtrend relative to growth-oriented stocks, bonds have made some progress in recent weeks. Charts, like the one below, tell us to keep an open mind about the balance of the week and year.
Investment Implications – Tentatively Bullish
We do not need to be a Harvard economics professor to understand why the charts presented above still align with the bullish case for the economy and equities. However, just as the market was unprepared for the “no taper” announcement in September, we have to keep an open mind about another sharp reversal in sentiment following the release of the Fed statement this Wednesday at 2:00 p.m. ET.
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Market Is Understandably Hesitant
Since volatility can spike near Fed meetings (remember May and September), part one of this week’s stock market outlook video covers what could be the most important thing in the world of investing – managing volatility. Part two shows longer-term bullish trends remain intact, but observable deterioration is present on shorter time frames.
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