On Wednesday, the question of the day was a bit of a head scratcher. You see, after listening intently to first the FOMC statement and then the ensuing press conference, the question on investors' minds was, when a change is made to the Fed's statement on monetary policy and yet the statement itself stresses that the change doesn't represent a real change, did anything a change or not?
By now, most of you are probably well aware of the fact that in her first meeting as Chair of the Federal Open Market Committee (aka "the Fed"), Janet Yellen made some adjustments to the "guidance" relating to what to expect from the Fed in the future.
Based on the reaction of the algos at Virtu, Getco, Citadel, Goldman, JPMorgan, et al, traders did not like what they heard. Immediately following the release of the Fed statement, the S&P 500 dove 10 points. However, this is a pretty typical response to Fed announcements. No, the bigger problem came later during the Q&A session of Ms. Yellen's press conference.
What Changed?
For starters, Ms. Yellen dropped the 6.5 percent unemployment rate "threshold" that, up to this point, had been viewed as the trigger that would cause the Fed to begin making changes to monetary policy. And while selling stocks on this may have been programmed into the algos, the move was widely expected.
Ms. Yellen explained that instead of a preset line in the sand (aka 'quantitative-based guidance') that Ben Bernanke wanted the markets to be able to see at all times, the Fed was moving to something a bit less transparent, something that was well, a lot more Fed-like.
In short, Yellen said the FOMC would now be watching what is being referred to as the 'Yellen dashboard.' As has been the case with the vast majority of Ms. Yellen's predecessors, Ms. Yellen declined to detail exactly what she and her fellow Fed Governors will be focusing on. However the new Fed head did mention that the indicators will include data on employment, inflation, and overall financial conditions.
This too may have caused some selling. But, again, it was also expected.
In addition, the FOMC members cut their forecasts for the rate of unemployment (a good thing) for 2014, 2015, and 2016. There was also some improvement in the forecasts on the outlook for the economy.
However, Yellen made it very clear at the press conference that the new guidance provided by the Fed does not reflect a change in overall policy intentions.
The "Dot Plot"
Although Fed Chair Yellen also cautioned against reading too much into the so-called "dot plot," (the prediction of the Fed Funds rate from each Fed Governor is plotted on a chart - see below) the bottom line is that the median target for the Federal Funds rate at year-end rose for both 2015 and 2016.
Year-End Federal Funds Target - AKA The "Dot Plot"
For those not well versed in fed-speak, this means that the median year-end target for the Fed Funds rate in 2015 is now 1.00 percent. The problem is this is up from the 0.75 percent level from the last plotting of the dots. And then the median prediction for the Funds rate at the end of 2016 rose to 2.25 percent from 1.75 percent.
There are two points to be made. First, let's keep in mind that the current target for the Fed Funds rate is 0 - 0.25 percent.
Second, and more importantly, the current dot plot suggests that the FOMC will begin hiking rates sooner and/or more aggressively than previously thought. NOW we're talking. NOW the algos had something to sink their teeth into.
While this sounds like a logical explanation for the Dow's triple-digit decline, the bottom line is that the big dive didn't happen until Ms. Yellen started answering reporter questions.
Getting Some Clarity
How do we know that it was something Ms. Yellen said and not the combination of the changes (that weren't supposed to be changes)? By watching the 1-minute chart of the stock market, of course.
As the new Fed Chair's press conference wore on (and on), suddenly, out of nowhere, the DJIA dove 170 points in less than 10 minutes. This, dear readers, is how you KNOW something is up.
It turns out that Janet Yellen had, whether intentionally or not, provided some clarity on what a "considerable" amount of time was. And based on the reaction in the market, this was a surprise - and not the good kind.
Recall that in the Fed's statement, the committee had said that the benchmark federal-funds rate would remain near zero for a “considerable time” after the QE bond-buying program ended. Then, for the first time, Ms. Yellen attempted to define that term, saying it was “hard to define” but “probably means something on the order of around six months.”
Wham! Down she went. Here's the problem... The consensus expectation for when the Fed will start raising interest rates is sometime in the third quarter of 2015. However, with the QE program set to taper to zero by year end, this means that Ms. Yellen and Co. could start raising rates in June. And the bottom line is this is EARLIER than expected.
THIS was something new. THIS is why the S&P was pounded for 1 percent in under 10 minutes. And THIS is why traders were suddenly freaking out.
Granted, stocks recovered about half of the algo-induced dive into the close. However it is worth noting that the markets don't like surprises, and THIS is the type of surprise that could be with us for a while. Stay tuned, this is about to get interesting.
Looking for Guidance in the Markets? We can help...
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!
Looking For Money Management Help?
If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.
ALL NEW: The next generation of the Daily Decision system is now available to clients of Heritage Capital. The new and improved approach (which is not available in subscription form due to the complex nature of trading the program) utilizes swing trading during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility and a smoother ride. Contact Heritage for details at (630) 250-4700.
Turning To This Morning... There appears to be a hangover effect happening in response to Janet Yellen's press conference. In short, traders around the globe are concerned that the Fed could start hiking rates sooner than had been anticipated. Overnight markets are a sea of red and U.S. stock futures are also pointing to further declines at the open ahead of Weekly Jobless Claims, the Philly Fed and Existing Home Sales reports.
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: -1.65%
- Hong Kong: -1.79%
- Shanghai: -1.42%
- London: -1.05%
- Germany: -0.86%
- France: -0.84%
- Italy: -0.59%
- Spain: -0.87%
Crude Oil Futures: -$0.40 to $99.97
Gold: -$19.30 at $1322.00
Dollar: lower against the yen, higher vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.771%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -5.32
- Dow Jones Industrial Average: -42
- NASDAQ Composite: -9.57
Thought For The Day...
"When strong winds blow, don't build walls, but rather windmills: ... turn every bit of adversity into fuel for improvement" --Nassim Taleb
Are you getting all the market research you need?
Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:
Our Mission Statement:
At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Follow on Twitter: @StateDave
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.