By Stoyan Bojinov
The roller coaster ride continues for investors as equity indexes oscillated between positive and negative territory on Tuesday in anticipation of the much awaited FOMC meeting Wednesday. Investor sentiment regarding the euro zone is quite uncertain and seems to change from hopeful to fearful at the flip of a switch; lawmakers overseas have failed to provide a concrete plan of action and the persistent uncertainty is well reflected in volatility across currency and equity markets. Gold made a move higher before the big Fed meeting tomorrow, and the precious metal settled just above $1,800 an ounce. Crude oil futures also went along for a wild ride, managing to come off the day’s high around lunch time and close just above $86 a barrel.
The FOMC meeting tomorrow afternoon is the headline event for the week as investors await to digest news of another round of stimulus, or lack thereof. Investors are without a doubt pricing in some sort of “good” news tomorrow with optimistic hopes centering on Bernanke’s plans to roll out another round of stimulus [see ETF Insider: Markets At Fed's Mercy]. While some are hoping for a reduction in interest paid on bank reserves held at the Fed, others are pegging their expectations on more aggressive easing measures including an increase in bond buying. While either of these situations are certainly possible, the latest talk has all been focused in on what is known as ‘Operation Twist’.
Depending on the size and scope of any measures announced tomorrow, shorter-term U.S. Treasury bond funds may come under pressure if Bernanke unveils a plan that is focused on increasing the duration of the Fed’s portfolio. The iShares Barclays 1-3 Year Treasury Bond Fund (SHY) is our ETF to watch for tomorrow as this popular fixed income offering is bound to see an increase in trading activity as the Fed announces its latest plans of economic aid [see Short-Term Bond ETFs: The Best Place To Stash Cash?].
SHY is fairly flat in terms of year-to-date performance, however, this ETF has been climbing higher over the past few months as investor uncertainty has failed to fade away. Since topping out at $84.75 a share on 8/10/2011, SHY has been stuck in a trading range, bouncing in between the $84.60 and $84.70 levels for the last five weeks [see SHY Charts].
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The fund is currently trading well above its 200-day moving average and has been building upon increasing levels of support, painting a moderately bullish picture from a long-term technical perspective.
Technical analysis only goes so far when important news releases are slated to come out, and tomorrow’s Fed meeting is certainly a big deal, in which case, fundamentals tend to dictate price action. In light of this, we advise novice traders to hold off from establishing positions, whether long or short, until after the FOMC announces its intentions and the markets react. In terms of upside, SHY could make a move higher, potentially breaking out above the $84.80 level, if Bernanke goes against expectations and does not announce additional stimulus measures.
If the Fed stays true to its “wait-and-see” approach, this could spell trouble for equity markets and prompt a violent sell-off as investors reassess the already dismal U.S. economic outlook. On the other hand, if the Fed steps in to buy longer-term bonds, SHY will sink lower, potentially breaking below the $84.60 level, in which case further downside should be expected. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.
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