Everyone's Talkin' About Yellen

Everyone's Talkin' About Yellen

Global equities are holding their breath ahead of a statement from the U.S. Federal Open Market Committee at 2 PM Eastern Time today.  

Everyone's Talkin' About Yellen
Everyone's Talkin' About Yellen

US stock futures dropped overnight, approaching a retest of Tuesday's lows, which had seen significant buying volume. The S&P 500 opened 6 points or 0.3% lower at 2,068. The Dow Jones Industrial Average started 79 points (0.4%) lower at 17,770. The Nasdaq Composite began the day down 14 points, or 0.3%, at 4,923.

30-year US Treasury Bonds continued their 7-day up trend overnight. Gold rose slightly from Tuesday's low. Meanwhile, crude oil hit a fresh six-year low Tuesday and hovered above it Wednesday morning.

Tuesday saw a 128.34-point loss for the Dow industrials (-0.71%) taking back much of Monday's 228-point gain. The S&P 500 finished about 0.33% lower on Tuesday. MarketWatch calls it "a case of pre-Fed jitters," but it's just as likely that traders simply wanted to lock in some profits ahead of the Fed announcement. 

It's tricky to assume a certain emotion is driving actions. Same goes for the put/call ratio that often gets cited at times like this: a large volume of puts could indicate outright bearishness or, just as likely, funds are planning to use puts to hedge new long positions.

In the short term, traders I talk to are looking past the FOMC (which they see as a done deal already priced in) to the end-of-quarter rebalancing of portfolios which mutual funds must do, and which they are already planning. Once the Fed sounds the all-clear, traders will take profits or cut losses on stocks they want to get rid of and they will also look to buy the ones they want to add more of.

Of course, they'll want to buy those as cheaply as possible, so don't read too much into any early drops in the market, no matter how much you hear about the market not liking what the Fed does today. A lot of traders have already decided what they'll do and are just waiting for 2 PM to start doing it.

The discussion has switched now from whether the Fed will raise rates to not just when, but at what pace. Obviously, starting sooner allows for a more gradual pace of increase. After 7 years of low borrowing costs, the Fed wants to firm up the lending environment, not choke it.

We should also not doubt that Janet Yellen has an eye on global repercussions, though she has so far only obliquely referred to Europe and emerging markets. A rapid increase in US interest rates will cause investors to pull money out of emerging markets, simply because the US would look too lucrative to pass up. A more gradual pace of increase would let funds and multinationals keep their emerging market ventures in their portfolios while gradually increasing holdings in dollar-denominated products.

My colleague Stan Shamu of the Australian branch of our parent company, IG Group, writes, "The smart money is likely to be looking to react to the results here as opposed to pre-empting them. The simple reasoning is that the move isn’t likely to be a mere flash in the pan and there will be plenty to digest from the meeting and press conference."

No one can predict what that longer-term "smart money" reaction will be for certain, but Jeff Hirsch of the Stock Trader's Almanac looked back at the 57 FOMC meetings since 2008 and found that while the market dipped less than half the time after a Fed meeting, 60 days later the market had gained about 3% in all cases. That means those smart enough to buy the dip made greater profits. Buy low, sell high, indeed.

Today's little 2 PM press conference will be, for many people, like this: either "Blah blah blah PATIENT blah blah blah," or just a lot of blahs to parse. Some traders simply cannot resist jumping in and the market will likely move right before and during the announcement. Trade it at your own risk, but it's a great time to limit that risk with Nadex binary options. You can't get stopped out and you can't lose more than your initial cost. No other financial instrument offers you that.

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