Markets swinging to the Bernanke two-step

Overview and Observation; Economic and interest rate concerns permeate the marketplace as various comments by Fed Governors move market back and forth. The “Bernanke two-step” started the markets on a “collision course” as his statement two weeks ago led investors and traders to believe an end to QE was “imminent.” Then last week he “corrected” his comments by stating that the QE would continue until the unemployment rate declined to 6.5%, it currently stands at 7.6%. In the meantime various other Fed presidents gave conflicting “opinions” on whether or not QE would continue “indefinitely” or come to an end later this year. That level of “contradictory” comment gave rise to wide price swings in the various indexes we follow as well as any interest rate related markets. Most markets are tied to the dollar, which in turn is based on expectations or comments on interest rates going forward. For that reason our comments and opinions are tempered. Without a definitive expectation for the basis, i.e., U.S. interest rates and their relativity to global rates, markets will continue to be “directed” by other than “supply/demand” factors. Now for some actual information to hopefully “guide” our readers and clients in the “future”…

Interest Rates: September Treasury bonds (CBOT:ZBU13) closed Friday at 134 12/32nds, down 28/32nds tied to comments by Federal Reserve Bank of Philadelphia President Plosser who said the central bank should “begin tapering bond purchase in September.” That statement helped the dollar and U.S. equities. Funds “make the trip” between the safety of U.S. Treasuries to risk assets such as equities depending on the “news of the day” or comments by Fed Presidents whether or not they are voting members. We told clients to take profits early in the day prior to those comments. We prefer the sidelines for now but with a bullish bias tied to expectations of a U.S. economic “deterioration” and the resulting equity market decline.

Stock Indexes: The Dow Jones Industrial Average closed at 15,464.30, up 3.38 in a choppy session as comments by various Fed members influenced traders. For the week the Dow gained 2.16%. The S&P 500 closed at 1,680.19, up 5.17 and for the week managed a gain of 2.96%. The tech heavy Nasdaq closed Friday at 3,600.08, up 21.78 points and for the week gained 3.47%. Market participants “celebrated” the decision by the Fed to keep Quantitative Easing in effect through 2014 as stated by the “last comments” of Fed Chairman Bernanke. Earnings “season” is in full swing and we expect the markets to be influenced almost on a daily basis for now. Our concern that there remains a “black hole” under the equity market and fully expect a major correction similar to that of 2008. We once again implore holders of large equity positions to implement strategic hedging programs, something we have developed over the years

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