Good Evening, Friends. We did get a look at the minutes from the last FOMC gathering this afternoon, and the market did react. As usual, the minutes were ambiguous enough to generate some confusion; the initial reaction was a rapid move down to 1636.25 on the E-minis, which was followed by an impressive bounce – particularly so for those who were short and enjoying life – to 1654.75. At that point, there were apparently no additional shorts to be covered, and certainly no one anxious to get long, and the remainder of the day was basically down, to a regular session close of 1636.50.
My (possibly erroneous) takeaway from the FOMC communique is that a mild degree of “tapering” from the current $85 billion monthly purchases of Treasury notes and bonds ($45 billion) and mortgage-backed securities ($40 billioin) will be authorized at the September 17-18 meeting. As I mentioned, it’s worth keeping an eye on $TNX (which gives the current yield of the 10-year Treasury note), as the bond market will probably respond first to changes in market perception of the Fed’s likely activities.
Short term rates will almost certainly remain at 0-25 basis points, so banks will still be able to make quite a bit of money. They may not be able to make as much in mortgages if longer-term rates are headed higher; Bloomberg reported this afternoon that WFC is laying off 2,300 mortgage lenders. Homebuilders and associated stocks like HD and LOW may be vulnerable. As far as the broader market goes, the area around 1629 to 1630 in the E-minis (daily chart) looks like potentially decent support, and the stochastics are indicating that a bounce is, if anything, now overdue. A break would, I suspect, lead to a fairly quick test of the 61.8% retracement level around 1611.Â
I could certainly be wrong about the Fed’s intentions, or economic data between now and mid-September may still sway some votes on the FOMC. Anything that indicates that tapering will be postponed or mild will probably be helpful for equities and equity futures, so the possibility of a decent bounce within what remains an uptrend (albeit a more tenuous one than was the case a couple of weeks ago) certainly exists. I went home with some long SPY Sep 165/162 put spreads, which will benefit from time decay. At the same time, if any Fed talking head suggests that tapering will not occur soon, I will exit without waiting for technical confirmation. I hate giving profits back even more than I dislike taking losses.Â
Best of luck!
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