MorningWord 9/19/13: If you are feeling a tad used and abused by the Federal Reserve’s “communication” over the last few months as it relates to their plans to dial back bond purchases, don’t worry, misery loves company. And if you were underweight equities heading into yesterday’s FOMC announcement, from what I can tell you will have plenty of company. It appears that not only was the entire investment world in universal agreement that the Fed would begin to Taper in Sept, the belief manifested itself for the last 3 months in billions and billions of dollars of re-allocation of risk assets in bonds, currencies, commodities and even equities in almost every corner of the globe.
The SPX broke out to new all time highs on yesterday’s news. Equity investors have been programmed for 4 years to nothing else other than to BUY equities and BUY Bonds, and that’s just what they did, because that has been the intent of Quantitative Easing to get people to buy risk assets and somehow those actions will improve our unemployment situation. I am not going to argue the merits of QE. There are much smarter peeps than me that you should probably listen to on the topic, but one thing seems fairly obvious to me is that the Fed does not feel that the fairly anemic economic recovery that we are in the midst of could handle interest rates any higher than where they have been over the last month.
While I understand the knee-jerk reaction in risk assets yesterday, largely due to poor positioning heading into it, it does not make a lot of sense that equities are rejoicing the fact that the Fed does not feel that the economy can stand on its own 2 feet. The only thing it appears the Fed has been reflating is the multiples of publicly traded companies. This set up should become increasingly worrisome, especially if our economy, and/or the global economy does not see a meaningful uptick in growth anytime soon. The higher we go without material economic improvement, the greater the potential for a crash from the highs (wherever they maybe).
In the meantime you would be foolish to try to pick a top, and probably a bit foolish not to continue to ride the upward momentum in equities. By no means would I be advocating adding new longs at current levels, but for those of you who are long and strong I think it makes sense to start considering some simple risk management principles of using stops to protect gains, or use options to help define risk while still offering a band in which you can participate to the upside.