Fed Day – It’s Clear as Mud

The much anticipated FOMC meeting brought us cryptic language (well, not as cryptic as in the Greenspan era), few surprises, and goofy action in the financial markets. With the news that the Fed would reinvest the proceeds of its maturing securities, primarily in 2 to 10 year Treasuries, the already steep long end of the yield curve got steeper as bonds of nearly every type took off for new high ground. Only the long bond stayed on the sidelines, the 30 year yield sitting right on 4%.

Stocks opened with a gap down from Monday’s close, then rallied later in the session to end with a small loss on the day. Market breadth, however, was very weak. All but the most indefatigable bulls seem to be joining the pessimist parade, but the SPX is hanging tough.

The real bumps and bruises came in the tech sector following a pessimistic analyst outlook, with the semiconductor firms getting particularly hard hit. I’m not sure it’s warranted, and there could be a buying opportunity in this sector.

The US dollar, which had found a little support at what seemed like it might be the end of a long slump, gave back a good portion of its gains. It’s opposite, the euro, halted a brief pullback and finished the day with a gain. Oil came back toward the $80 mark in a general commodity selloff driven by recession/deflation fears.

Downbeat economic news is continuing to drive these market moves, but my view remains cautiously optimistic. It seems to be lost on a lot of folks that employment and corporate profitability could be de-coupling. If there’s a “new normal” here, that looks like it to me.

This means we could continue to get lousy macro economic data and decent corporate profits at the same time. A lot depends on what sort of multiple investors are willing to pay for equities. That bond party is looking awfully crowded, and the technical picture in stocks doesn’t look so bad yet.

Bottom line: still in wait and see mode. This is a mid term election year, there is hint of desperation in the air, and we have a lot more to come at us in the next few weeks and months. Keep the powder dry for now, we’re going to need it soon enough.

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