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Will the Fed Intervene to Stop the Carnage?

By  +Follow August 19, 2013 5:59AM
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The bond market is in turmoil, as investors scramble to adjust for the unknown consequences of  the Fed’s taper out of its $85 billion monthly bond purchases.

   The yield on  U.S. 10-year Treasury Notes is up to 2.83 pct., up from 1.87 pct. three months ago.

  The U.S. two-year interest rate swap spread is rising showing an increasing preference for government bonds versus corporate bonds, as investors fear more carnage.

   Credit default swaps used to hedge against losses or to speculate on creditworthiness have  risen  sharply.* 

   Stock charts have turned ugly, with big names taking a hit, and the 10-year bond interest rate rising persistently.

WILL THE FED  RESPOND TO PREVENT FURTHER CARNAGE ?

   They did so after the stock and bond markets tanked following Fed chief Bernanke’s June 19 comments about taper beginning in the fall and ending in mid-2014, as a host of Fed presidents and governors hit the speaking circuit to assure the Street taper didn’t mean the Fed was abandoning its low interest rate policy.

   Their action prompted an 8% surge in the S&P 500.

   This can pose a problem for short-sellers and investors trying to decide if they should protect their  portfolios from  further losses.

      With 65% of  economists surveyed by Bloomberg expecting the Fed to begin to taper in September, the surprise here would be an announcement it won’t set taper into motion until later in the year.

   That would prompt a sharp rally in stock prices, and some increase in bond prices, though that didn’t happen in June and July.

CONCLUSION:

   My point here is, short sellers and sellers intent on damage control must be careful. A rally can be triggered by a single comment by a well-placed Fed official that interest rate fears are ill-founded.

   This is a poor way to manage an exit, but it is what it is.

   I still see a correction into September/October, one that can take the DJIA down to DJIA 14,250 (S&P 500: 1,542), or more.

   But that is without the Fed micro-managing the markets.

   I am basically supportive of what the Fed has done since the 2008/2009 financial crisis, but alarmed at how it has managed its exit. 

   Minor resistance is DJIA 15,130 S&P 500: 1,660.

   A break below DJIA 15,054 (S&P 500: 1,652 raises the odds of a drop of the DJIA below 15,000 (S&P 500: 1,645).

Investor’s first readan edge before the open

DJIA:  15,081

S&P 500: 1,653.83

Nasdaq  Comp.:3.602.77

Russell 2000:  1,024.30

 Monday, August 19, 2013     (9:15 a.m.)

  

   TECHNICAL OBSERVATION – STOCKS:The following are observations based on solely on technical analysis and don’t give consideration to fundamentals or changes in brokerage ratings which can  have an immediate impact on stocks, justified or not.  The idea here is to give readers insight into the likely trends and turns in the stock’s price, short-and long-term.

   I picked up on AAPL and FB last year when they were in a tailspin, and  picked up on IBM recently for the same reason, and am including Pulte, since it has been in a  pronounced slide.  These are not to be construed as  buy or sell recommendations.

These are not stocks I have recommended.

   Apple(AAPL: $502.33)

More buyers than sellers Friday. While volume dropped off, it acts like it wants to add another 8 points today.

Carl Icahn tweeted he has a large position in AAPL with  a suggestion  of more to come. News sent the stock beyond my projected resistance of $480. Icahn met with AAPL CEO Tim Cook yesterday.  Icahn will undoubtedly pressure Cook to put  the company’s idle cash to work most likely through stock buybacks. Hmmm, Wouldn’t that even enhance the value of Icahn’s position further ?

Facebook (FB - $37.08)

   No change  here.

   Support looks good in the $35 – $36 area and will be hit if FB breaks below $37.. FB is digesting its  48% run July and early August.  Resistance is now $37.40

IBM ($185.34)

   A drop to $181 is likely and possibly $174.

   Be aware that IBM has ranged four times up and down between $185 and $215 over the last two years.  Unless the fundamentals are horrendous  it is due for institutional buying, most likely in this area and possibly at or a smidge below $180.

Each point up or down impacts the DJIA by about 13 points.

PulteGroup (PHM- $16.28)

As expected, the Homebuilder  group is turning the corner.  PHM should run into a little resistance  as it nears $17.  A correction back to $15.65 would be reasonable.. 

 ECONOMIC REPORTS:

Thursday reports dominate the week.

   For a detailed account of past and current economic reports, including charts go to: mam.econoday.com - www.mam.econoday.com.

 

MONDAY: No major reports

TUESDAY:

Chicago Fed National Activity Rpt. (8:30) No projection available

WEDNESDAY:

Existing Home Sales(10:00)  Proj.: 5.15 million rate July vs. 5.08 million June

FOMC minutes made public  2:00 p.m.

THURSDAY:

Jobless Claims (8:30) Proj.: 329,000 for week ended 8.17, up 9,000 from a week ago.

PMI Mfg Ix. (8:58)   Proj.:  Index for  August of 53.5  vs. 53.7 mid-month.

FHFA House Price Ix. (9:00)  Proj.: +0.6 pct June vs. +0.7 pct May

Bloomberg Consumer Comfort Ix. (9:45) 

Leading Indicators (10:00)   Proj.: +0.5 pct. June vs. +0.2 pct May.

Kansas City Fed Mfg. Ix. (11:00)  Proj.: Index rise to +5 in August vs. index of 6 in May

Federal Reserve’s Richard Fisher speaks (2:00)

.FRIDAY:

New Home Sales (10:00)  Proj.: 487,000 unit rate in July  vs. 497,000 rate  in June

RECENT POSTS:   2013

Aug 5   DJIA  15,658  “August/September Correction Looms”

Aug 6   DJIA  15612   “Market Doesn’t Need Reason to Correct”

Aug 7   DJIA  15,518   “Uncertainties to Plague Market Until September”

Aug 8   DJIA  15,470   “DJIA 14,250 by Early October, or Worse

Aug 9   DJIA  15,498   “Has a Correction Already Started ?”

Aug 12 DJIA 15,425   “Taper, A Withdrawal Process From Addiction”

Aug 13 DJIA 15,419   “Homebuilders Ready for a Bounce ?”

Aug 14 DJIA 15,451   “Hindenburg Omen – Worth the Worry ?”

Aug 15 DJIA 15,337   “October Buying Opportunity at Much Lower Levels”

Aug 16  DJIA 15,112  “Fed Pressed for Clarification – Rallies Suspect”

*Bloomberg.com

  George  Brooks

“Investor’s first read – an edge before the open”

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk. Brooks may buy or sell stocks referred to herein.

 

 

 

 

 

 

 

 

 

 

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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By  +Follow August 19, 2013 5:59AM
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