Heading into the all-important Federal Reserve policy meeting on Wednesday, investors and traders alike are desperately trying to get a sense of what Bernanke & Co. will decide. Will they taper their ongoing $85 billion-a-month long-term bond-buying stimulus? Or will they hold off, as analysts at Bank of America Merrill Lynch expect, until their October or December policy meetings?
Or perhaps a small taper will be combined with an easing of so-called “forward guidance” on short-term interest rates, promising to keep rates near 0% for longer.
The market’s performance Monday — surging in response to news that Larry Summers, a potentially hawkish candidate for the Fed chairmanship, is out of the running — shows just how sensitive stock prices are to what’s happening within the Eccles Building in Washington.
Thus, it is with great interest that I’ve noticed signs the market might be discounting a smaller-than-expected tapering.
Long-term interest rates are pulling back as Treasury bond prices stabilize. The U.S. dollar is testing the bottom of its four-month trading channel, presaging a possible breakdown here, as would be expected if the Fed is going to keep pumping cheap money into the financial system.
In stocks, I’m seeing interest-rate-sensitive areas — which had been beaten down after the Fed first started talking taper back in May — come back to life.
Click to Enlarge Just look at the performance of mortgage REITs like Anworth Asset Mortgage (ANH), which is punching above its upper Bollinger Band in a big way for the first time since March. Or Arlington Asset Investment Corp. (AI), shown to the right in a picture-perfect breakout pattern.
Or how about housing stocks, with the Homebuilders SPDR (XHB) on the move with solid volume for the first time since April? The turn in the iShares U.S. Home Construction ETF (ITB) is even more dramatic, threatening to make an upward cross of its 200-day moving average for the first time since late 2011.
Of course, no one really knows whether Bernanke will meet these increasing dovish market expectations. So while these stocks look attractive here, I’m recommending clients raise a little cash heading into Wednesday’s decision. I’m also selling off positions in my Edge Letter Sample Portfolio.
I’d rather avoid the volatility that’s sure to come, and chase (if necessary) an ongoing rebound than suffer disappointment if the taper is larger and harder than expected.
As of this writing, Anthony Mirhaydari did not hold a position in any of the aforementioned securities.