And The Fed Does…

It’s A Fed Day!

OK, today is a Federal Reserve Bank Day (FOMC announcement). They announce what they are going to to with interest rates and make comments about goals like, oh, more “Quantitative Easing”. Then the markets tend to go wonky for an hour or two until folks figure out what this will mean.

That’s part of why I went to cash last week (and part was just to take a break and bank some money). But the risks go up on a Fed Day (and the potential gain), but it’s a crap shoot, so I’m watching, not participating today.

As we saw in; The Fed has been on a binge of buying assets, inflating their balance sheet, and issuing money in the process. This can prevent a deflation (deflation is a very bad thing) but in the long run can lead to inflation (also a very bad thing). So if The Fed says they are doing more, the fear will be of inflation and a bad economy needing life support. But if The Fed does less, the fear would be that they are not doing enough to keep the economy afloat.

Yes, nutty. Folks want to panic, and will look to panic over the fear of either ‘too much’ or ‘too little’. So often it is more important to see which way the market goes about 5 minutes after The Fed announcement than the actual text of what they say. The sum total of all the bets being placed by all the market participants tells you how they, net, evaluated the whole thing.

I’m expecting no interest rate change (so little impact on bonds) but ‘happy talk’ about more Q.E. on the cards (and that spooking some of the market a little with more future inflation fears). With $100 Trillion of shortfall on Social Security (once you figure in the demographics) over the next decade or two and a similar $100 Trillion of shortfall in Medicaid and similar ‘entitlement’ programs, IMHO, the only choice our government and The Fed has is to “inflate away the debt” longer term. So I’m pretty sure they will say “QE2” is being prepared to sail if needed. And that will cause commodities to rise and stocks to fall. We’ll see if I’m right when The Fed announces.

Live Market Chart

Here is a live chart of the market. Currently the Dow is off 13 points and the S&P is off 3.4 points.

Dow Industrials, S&P 500, Nasdaq 100, Russell 2000, Gold, and Dollar Down

Dow Industrials, S&P 500, Nasdaq 100, Russell 2000, Gold, and Dollar Down

DIA  -  Dow 30 Industrials
SPY  -  S&P 500 largest market capitalization
IWM  -  Russell 2000 small cap
QQQQ -  Nasdaq 100 tech stocks
GLD  -  Gold Exchange Traded Fund
UDN  -  Bet on "dollar down" Exchange Traded Note

With gold presently on a rocket ride and UDN rising (meaning the dollar is falling) the market sentiment now is that The Fed is going to inflate. We’ll see if that holds up after The Fed announcement.

And The Fed Said:

Interest Rates: Held at 0% to 1/4%

QE2: Will continue policy of investment (QE). Keeping loan rates stable and low.

Sentiment: Recovery underway, modest, but needs ongoing management and help.

Evaluation: Sounds like “More QE Maybe” and keeping the present QE in place. Looks like a set up for more QE next time. I’d expect the dollar to fall more, gold to rise more, and stocks to go nowhere much.

Looks like a bit of euphoria on the news today, probably with a drop tomorrow as the buzz wears off. News flow has the stock traders interpreting it as more QE soon, so somehow good for stocks. It may keep a deflationary recession away, but inflation is not kind to stock values. All I can figure is it’s a short term rise and longer term drop.

UPDATE: After market close we have this chart:

Fed Mtg FOMC Day 21Sept2010 10 Day 5 min

Fed Mtg FOMC Day 21Sept2010 10 Day 5 min

This has the “time scope” Zoomed waaaay in tight to a 5 minute tick. So we have 5 days here. First, notice that each day has more volume early and late with a fade in the middle. Then look at the last day. Volume dries up to nearly nothing as everyone waits for The Fed. Then volume rises as prices shoot up (but fades quickly). As price turns around and runs down, volume accelerates into the close. More total on the dropping period than the rising as momentum fails. We end the day about where we began.

This looks to me like a failed rally as folks figured out that not much good was happening after all.

I know the charts say to still be in this market, but I just don’t like the way it’s moving. Really up on one day, a schitzo day today. Volume building into the close / drop.

I think I’m going to be doing more with metals and commodities for a while…

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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14 Responses to And The Fed Does…

  1. KevinM says:

    Left money on the table, but no regrets. Looks like the top of the trading range, but I’m taking a month off unless we get up toward 1200, which would be a short point. I have no idea at all whether the 6-month range will hold.

  2. E.M.Smith says:

    I’ve generally got the same evaluation. Left some on the table, but left a load of risk there too. If The Fed had taken just a slightly ‘wrong’ action the drop would have wiped out much more. Then there is that end of the day high volume sell off. That has me very concerned about tomorrow. And look at the run up mid week. Almost nothing visible in the volume. I suspect some short covers ahead of The Fed.

    So at this point it may run up a couple of more days (IMHO) but I don’t care. I’m waiting for the “October Short” trade…

  3. Layne Blanchard says:

    The problem with using QE to inflate the debt away is that SSI is inflation indexed. And since Medicare is a pay as you go arrangement, those costs will respond to inflation also. The existing 13 Trillion are only short term treasuries (I thought) Maybe a few years term. So, no relief there either.

    I understand the desire to fight deflation, and there’s a lot I don’t understand about this, but I read the Marxists, er, uh, I mean Democrats – are looking at possibly confiscating private investments (401K) So I’m moving away from paper instruments for things with intrinsic value.

    But where do you hide? I’m buying some Real Estate. People need a place to live. I’d like to get some gold collectibles held in safe deposit overseas….but, uh, where?

  4. Luís says:

    That’s part of why I went to cash last week

    Given how the US$ has been faring of late that was a very questionable choice. Take care.

  5. E.M.Smith says:

    @Luis: I didn’t say WHICH cash ;-)

    I us the US Dollar for about 3 days at a time (the settlement window) most of the time. If I’m really worried, I’ll hold some UDN against it.

    But yes, there are times that being in USD even for a few days means a theoretical loss against other currencies. As the things I need to pay (like my mortgage) are in USD it’s just not that big a deal to me. Also, everyone needs ‘time off’. When I do that, I’m not interested in trading ForEx while I’m doing other things… So, for example, when going to the doctor (for self or spouse) and being ‘away from markets’ both physically and mentally for several days: It’s a bad time to be betting that the Japanese Central Bank is not doing to intervene and drive the Yen down (which they did one day last week or so). So while there is a theoretical risk of hypothetical loss holding cash in your home currency, there is a far greater risk of a real loss by being a trader who is paying no attention to positions.

    So when I take a few days off, I’m taking a few days OFF. Come what may. On average, that works out better for me.

    @Layne: Remember when Reagan had the CPI redefined to take fuel costs out and “stop inflation”? … The game I expect is something like that. SSI will be “indexed” to something that is not very upward sticky… They will do other things too (raise retirement age, cut total medical care, add copays, etc.) but the main game I expect to be changing the language and definitions of such escalators.

    Obama care was largely for the purpose of ‘3rd partying’ the Medicare costs via getting all the young folks to pay for ‘insurance’ they would never use and redirect that money to the old folks. Moves the disaster about 8 years further out (while making it larger). Basically when a Ponzi scheme starts to come apart, the fix is to pull in more fresh marks.

    The ‘Dr. Fix’ was the plan to deal with the cost explosion by basically screwing the Doctors by not paying them much. Expect more of that too. So the Govt can simply define the rate of pay and that’s that. Bingo, no medical cost inflation… They already do that in Medicare which was the major source of private insurance cost inflation as the “providers” moved that underpaid “Government insurance cost” onto the “rich” folks with private insurance. So the Government got low “price inflation” and you got “double price inflation”. Easy enough to define “medical price inflation” as “based on government payments only as private costs are too volatile”.

    Then just inflate the money at a rate faster than you raise what you pay for “medical bills”. After all, if the Doctors and hospitals don’t like it, they can always bill the other government … Oh wait, there isn’t one…

    But even if they didn’t, the ability to issue a few $Trillion to fund government for a few years, then erase THAT via inflation, will be enough to make it attractive.

    The present debt is a ‘ladder’ of maturities from a few days up to 30 years or so.

  6. wolfwalker says:

    “I know the charts say to still be in this market, but I just don’t like the way it’s moving. ”

    Connected with this, there’s an interesting story I ran across this morning. Remember the “flash crash” back in May? Apparently some of the responsibility for that traces back to ‘High-Frequency Trading’ (HFT) computerized systems run by a few traders, which specialize in enormous amounts of trades at very high speeds. More than half of US daily trading is HFT now.

    From the article, it looks to me like these HFT systems kinda feed off each other, which affects the price of stocks for the same reason that ‘pump and dump’ schemes work: a high volume of buying drives the price of a stock up, whether the actual value of the underlying company warrants it or not. If HFT trading is pumping a lot of big-name stocks, would that explain why the Dow keeps going up when all the long-term indicators are stagnant or trending down?

  7. E.M.Smith says:

    IMHO, yes. Part of the newsflow on financial talk shows is about how ‘retail’ and mutual funds have dramatically left the market. So what’s left?

    When retail pulls back and Joe Average is not buying, they also tend to pull money out of mutual funds. Retirement accounts. Etc.

    We’re left with market makers, trading desks, hedge funds, the HFT crowd writ large. And then you get to start seeing the schitzo behaviour of computer models making the decisions.

    So we had a bit of a spike up (computer driven? Or some sales desk sticking prices up a bit on the news?) that caused a rapid volume spike but the volume faded as the computer driven trade did not cause the expected ‘pile on’ by people who where no longer there… and as soon as the volume started to reverse to the downside we got even more acceleration to the downside as all the computers decided to reverse their prior trades and double down. The hysteresis built into the computer programs had no damper from human inertia, and we got that rapid flip / flop…

    No idea if that is actually what happened or not, but it seems like a reasonable story.

    One other bit of news flow was that many hedge funds are underperforming as their old trade systems are not performing now. So yeah, we have a bit of corroboration that the ‘retail’ guy got tired of being fleeced and pushed back from the table. Now it’s just the wolves all looking each other over and not much fresh meat…

    So that, too, is part of why I’m being more ‘twitchy out’ and ‘cautious in’ on my trades. NOT jumping in on small momentum indications. Waiting for clear trends. Basically, moving my response time outside the ‘twitch’ time of the HFT computers…

  8. David says:

    “Part of the newsflow on financial talk shows is about how ‘retail’ and mutual funds have dramatically left the market. So what’s left?”

    Hum? , mutual fund cash holdings have fallen to a 3.4 percent record low, do not know what is left in this rally.

  9. E.M.Smith says:

    I think there are two parts. How much cash the mutual funds have as a percent, and how much money folks have simply sucked out of the funds period.

    A lot of folks took their money out of mutual funds and sunk it into bonds or, increasingly, gold.

    So I see a double whack here. Money net leaving mutual funds AND funds not having much cash left to deploy… Yeah, not much fuel to move the rally. And the number of quant funds that have shut down is rather large too.

    BTW, where do you get the percent cash holdings statistic?

  10. forexhug says:

    iam only trading gold and other major currency but nice good article thanx

  11. E.M.Smith says:

    @David: Thanks! Looks like his stuff ought to work.

    @Ruhroh: Sounds about right to me….

  12. @E.M.Smith
    The ‘Dr. Fix’ was the plan to deal with the cost explosion by basically screwing the Doctors by not paying them much. Expect more of that too.
    The offer should increase. It is artificially “managed” by AMA though keeping the demand of md’s greater than the offer.
    So offer should be greater that the demand. Here the market is being manipulated for worse, it must be freed. It is a typical case of an anti constitutional “trust” which should be “democratized”.

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