How to Trade the Fed’s Action

The Bloomberg headline reads Fed Bond Buying
May Risk Price Rise Similar to 2004
. Let’s remember that between
2004 and 2007, the S&P 500 rose around 40%, from approximately 1,100
to 1,550.

I think we would all be pretty pleased with a move
like that.

Of course, the rise in the S&P 500 coincided
with the housing bubble and the proliferation of sub-prime mortgages that
led to the financial crisis of 2008-2009.

Manufacturing Supports Stock Prices

We’re in the home stretch. Mid-term elections are
tomorrow. And then we get the Fed’s announcement on a new round of
quantitative easing on Wednesday at
2:15
ET
.

If you’ve never watched the market trade ride after
a Fed announcement, it can be spectacularly volatile. And I would expect
this Wednesday’s post-statement trading to be especially volatile. A
100-point swing or two on the Dow Industrials wouldn’t surprise
me.

Against the backdrop of the Fed and the elections, we have improving
economic data and another solid earnings season.

Bernanke’s Burden

I don’t want to temp fate. I’m not trying to jinx it. I
understand that stocks (and gold, and oil) are rallying on the Fed’s promise
and the falling dollar.

But this rally just doesn’t want to reverse.

Yesterday was wide open for the bears to take prices lower.
Financial stocks, usually thought of as stock market leaders, were absolutely
crushed. It was a rout. Bank of America (NYSE:BAC) got creamed for 5%. Citi
(NYSE:C) lost 4.5%. Even JP Morgan (NYSE:JPM), after a good earnings report,
was down as much as 4% at its lows of the day.

What’s the Fed’s Number?

Well, new unemployment claims rose by 13,000 to
462,000 last week. I probably don’t have to tell you that unemployment is
moving in the wrong direction.

Of course, we’ve discussed the fact that
unemployment is a lagging indicator and will be among the last data points to
improve until we’re blue in the face. And really, investors seem to be
looking beyond the weekly swings.

What are they looking forward to? Why, quantitative
easing, of course. These days, any weak data makes it seem more certain that
the Fed will dump as much as $500 billion into the system in some form of
asset buying.

The Fed Wants Inflation

Yesterday, the Fed said it was prepared to move on new
stimulus if the economy weakens further. What’s more, the Fed’s statement
that inflation is below levels it wants to see suggests that further easing
is coming. That’s a clear indication that the Fed is still worried about
deflation.

I suppose it’s a good sign that the Fed held off on new
easing action. But the Fed also failed to sound a confident tone about the
economic recovery, which I think is mistake.

Of course, we know the economy isn’t great. But most
economic data has improved over the last month or so. And it should be
understood that there is no magic bullet that puts millions of Americans back
to work. It’s going to take time, re-training and probably some government
incentives.

What the Fed Should Say

Today is Fed day. That’s when we will get the latest policy
announcement and economic outlook from the Federal Open Market Committee
(FOMC). There are 8 of these meetings a year, and the Fed uses these meetings
to decide whether to change interest rates, among other things.

FOMC have been market-moving events for a while now, as the
U.S. economy has struggled.

When the Fed has good news for the markets, its job is easy.
But days like today require some careful comments.

Major Changes Expected for Index Funds as Russell Rebalances







Russell Investments will reconstitute the stocks in the Russell Indexes
after the closing bell today, Friday June 25. For many funds that track
Russell’s indexes this means there will be frantic buying and selling over
the coming days.

Given the turmoil in the market over the past 12 months, analysts are
looking for many familiar stocks to be jettisoned while previously unknown
stocks are cast in the limelight.

Will Cash on Hand Lead to Hiring?






Sometimes, trying to decipher the stock market’s signals
is easy. Like during the rally out of the March 2009 lows. It was clear
that stocks were ready for a strong move higher.

Sometimes, it’s more difficult to get a handle on the
subtle shifts in sentiment that drive stock prices. The correction in
January of this year is one such example.

Other times, it’s darn near impossible to read the tea
leaves. I’d say now is one of those times. The stock market is giving off
mixed signals. And that’s because, at the most fundamental level, the
economic picture is mixed. For every bullish point investors can make,
there’s an equally valid bearish counterpoint.