Sell These Instruments of Destruction Now

by Sam Collins | March 20, 2014 2:37 am

Stocks traded in a very narrow range Wednesday until the Federal Reserve’s policy statement was released. Although much of the report was a rehash of the past year, 10 of the 16 members said they expected a 1% or more uptick in the benchmark interest rate by the end of 2015. Following the release, the S&P 500 fell from 1,870 to 1,850 in 30 minutes, but half of the loss was recovered in the last half hour of trading.

In addition to the rate talk, the Fed announced another $10 billion cut in its bond buying program to $55 billion a month. It also dropped its policy of tying rate increases to an unemployment target of 6.5%.

Gold fell, with futures off over 2% at $1,330.70 a troy ounce. And Treasuries plunged, driving the yield on the 10-year note to 2.77%. Banks usually benefit from higher rates, and so Bank of America (BAC[1]), Citigroup (C[2]) and JPMorgan Chase (JPM[3]) all rose.

At the close, the Dow Jones Industrial Average fell 114 points to 16,222, the S&P 500 lost 11 points at 1,861, and the Nasdaq fell 26 points to 4,308. The NYSE traded total volume of 3.3 billion shares, and the Nasdaq crossed 2 billion shares. Decliners outpaced advancers on the Big Board by over 3-to-1, and decliners outnumbered advancers on the Nasdaq by 1.8-to-1.

DJU Chart
Click to Enlarge

Chart Key[4]

Utility stocks are generally considered to be “bond substitutes,” so when there is talk of higher interest rates, the group usually takes it on the chin.

The Dow Jones Utility Average was hit hard Wednesday, dropping from its highest level since May of last year and forming a potential double-top. There is plenty of support at about 500, but that’s a drop of another 3%.

FRA Chart
Click to Enlarge

There are ways to protect against rising rates and falling bond prices, and the Blackrock Floating Rate Income (FRA[5]) is one. Be sure to check out the features of contrarian bond funds to determine if they fit your objectives and risk tolerance. Others include iShares Floating Rate Bond (FLOT[6]) and the PowerShares Senior Loan Port (BKLN[7]).

Conclusion: Although no major or even intermediate trends were negatively impacted, the near-term trends of the major indices have had their upward momentum interrupted by the murmur of higher interest rates.

Yesterday, I concluded by saying[8], “If the Fed decides to accelerate its cutting of the stimulus package and goes for a small increase in interest rates, look out below.”

Wednesday’s overreaction to a discussion by the Fed of a possible increase in rates by the third quarter of 2015 sent bonds and bond substitutes lower. Our readers have been warned since mid-2013 that a move up in rates could destroy bonds and especially bond funds. For those tenacious holders of these instruments of destruction, now is the time to exit.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[9].

For a list of this week’s economic reports due out, click here[10].

  1. BAC:
  2. C:
  3. JPM:
  4. [Image]:
  5. FRA:
  6. FLOT:
  7. BKLN:
  8. I concluded by saying:
  9. click here:
  10. click here:

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