Fed Playing a Volatile Game

 

“Obstacles cannot crush me. Every obstacle yields to stern resolve. He who is fixed to a star does not change his mind.” — Leonardo da Vinci

 

The last couple of weeks has seen Wall Street moving in something of a sideways trend, though that hardly indicates the increased level of intraday volatility that the equity market has been experiencing since the last week of May.

Will it be more of the same for the coming week?

Bet on it, at least in terms of the volatility aspect, as Ben Bernanke and his merry band of Fed policymakers peel their cards away a few inches from their collective vest to expose just a bit more information about the most likely direction the Fed’s massive bond-buying program will take.

It is unlikely that there will be any major revelations out of the mouth of Big Ben at his scheduled Wednesday press conference, though there will possibly emerge just enough of a consensus interpretation regarding the “tapering off” of the Fed’s $85 billion-per-month bond purchases to move the market off its current sideways trend.

This past week saw the Dow Jones Industrial Average (DJIA) shed 1.2%, while the benchmark S&P 500 Index (SPX) lost an even 1% over the course of the same time frame. Meanwhile, the Nasdaq (COMP) dropped 1.3%, making it the week’s biggest loser among the three major indices.

There is a bit of a debate among financial analysts as to whether Bernanke intentionally meant to roil the markets just a little bit with his most recent comments as to the timing on the Fed’s lightening up on its stimulus efforts. After all, a little bit of tightening of a frothy stock market might not be viewed as a bad thing from the Fed’s perspective.

On the other hand, attributing any deliberate plan into statements that may have merely been misspoken words may be nothing more than a fool’s parlor game.

But that is pretty frequently what happens right before, and just after, the Fed “speaks.”  There is no reason to expect this week to be any different.

But which way will the Fed’s wind blow?

Well, the fact is that the economy remains sluggish, as indicated by an expected drop in the GDP numbers for the second quarter, and unemployment remains high enough, at 7.6%, to warrant the Fed’s attention vis-à-vis its mandate. So it would not be a surprise if the country’s central bank might make the slightest of indications that the tapering certainly remains on the boards, but not yet in play.

But the Fed is currently configured as a bundle of conflicting opinions, and therefore solid predictions, never an easy task for analysts or oracles of any ilk, is perhaps even more difficult than usual.

So, all in all, for those with a weak constitution, it might be best to tighten up the portfolio, enjoy a few days of rest at the beach, and return to the party at week’s end, when the noise has died down a bit and some intelligent interpretation of the undoubtedly meager offerings provided by the Fed has occurred.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. This week plays out as a mirror of the last one, with the Financial Sector leading the rankings, Technology in second place, and Health Care coming in at third.

Here is the current list of some of the top performing Financial Sector ETFs year-to-date, as of the second week of June:

KIE — SPDR KBW Insurance ETF, +22.18%

FXO — First Trust Financial AlphaDEX Fund, +19.46%

IYF — iShares Dow Jones US Financial Sector Index Fund, +18.30%

XLF — SPDR Financial Select Sector Fund, +19.28%

VFH — Vanguard Financials Index Fund, +17.77%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.