Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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Draghi & ECB Deliver

It’s a very busy week for the markets and economy coming off the ECB’s long anticipated announcement of Euro QE last week. On the one hand I thought it was smart to leak the $50B euros per month plan so that markets could digest it ahead of the official statement. It was also a great move to then exceed the number that was leaked by $10B euros.

On the other hand, I am not in favor of this piecemeal approach when everyone already knows that $60B euros per month won’t be enough. If Mario Draghi was truly committed to QE and saving the euro “at any cost”, they would have pulled all stops and done the shock and awe of AT LEAST $100B euros per month right away. It would caught everyone off guard in a positive way except for those who are positioned against QE, exactly the folks the ECB is trying to combat. It would have sent such a powerful message to the markets.

Yes, I know. The Germans are ardently opposed to QE. Blah, blah, blah, blah, blah. That may be their public stance with Merkel pounding the table in opposition, but in reality with their export economy on the verge of recession, a weaker euro is precisely what the doctor ordered. As I have long discussed, this is just another currency battle in what some have termed, “a race to the bottom”, meaning that countries are devaluing their way to prosperity. (Insert incredulous look, head scratch and head shake)

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Fed Should NOT Taper!

Paul Schatz, president of Heritage Capital, typically lets it all hang out when expressing his views on markets, economics and sometimes even politics.

An active asset allocator and adviser with 25 years’ experience, Mr. Schatz is on board with the Federal Reserve‘s quantitative-easing policy and would even like to see it extended beyond early next year, when the Fed is expected to start tapering its $85 billion in monthly bond purchases.

InvestmentNews: Do you think it’s time for the Fed to start reducing the five-year QE program?

Mr. Schatz: From my perspective, the answer is no. If you believed in quantitative easing to begin with, you can’t stop now. The results of stopping now will be disastrous. The big problem is QE was created because rates were already at zero, so it is effectively a way to get negative rates. I don’t believe the economy can stand on its own right now without quantitative easing.

InvestmentNews: What do you want to see before you’ll support tapering of the QE program?

Mr. Schatz: Ever since 2008, my thought has been that this is a typical post-crisis recovery. You don’t cut back on QE until we get through the next recession. There’s always another recession coming, that’s the business cycle. If we had quit QE after the first round, we probably would have had another recession and then we probably would have been done with it, but it would have been painful.

InvestmentNews: What is the biggest challenge facing the U.S. economy?

Mr. Schatz: I don’t think there’s a single biggest challenge. We’re living through this typical post-recession recovery. Companies are beating on [the] bottom line, but not on [the] top line. But probably the biggest challenge is the employment markets, but they are functioning exactly as they should in a post-recession recovery. We are going according to the script, but people don’t have the patience to live through it.

InvestmentNews: Where do you see the greatest areas of opportunity?

Mr. Schatz: That’s the toughest part. You have a triple-digit gain in this bull market, but the bull market is old. I think we’re approaching crucial point toward either a melt-up followed by a correction of 50%, or we peak during the first quarter of next year and have a garden-variety pullback of 20% or 30%.

The opportunity is to be really, really mindful of the portfolio. Presumably, most people have made a lot of money in last five years. People are feeling really good and they’re into passive strategies. I think this is the most opportune time to employ active strategies in a portfolio. Right now, we’re in the danger zone where risk is increasing every day, and you need to lay some protection on the portfolio.

InvestmentNews: Do you think the botched Obamacare rollout will have any impact on the markets?

Mr. Schatz: I think it has zero impact. Except for making incredible media fodder, I don’t think the rollout or fixes is having any impact on markets right now. I do think it will have a permanent and detrimental impact on the economy longer-term.

Jeff Benjamin covers investment strategies in his award-winning column, Investment Insights, and also dives deep into the minds of leading portfolio managers in his regular column, Portfolio Manager Perspectives.

http://www.investmentnews.com/article/20131119/FREE/131119899?issuedate=20131119&sid=INTEL&utm_source=marketintel-20131119&utm_medium=in-newsletter&utm_campaign=investmentnews&utm_term=text#

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