What Is The Federal Reserve's 'Rat' Trying To Tell You?

Includes: DIA, IWM, QQQ, SPY, TLT
by: Southwest Michigan Trader

Late this evening (Friday), the Fed's rat Jon Hilsenrath posted an article on The Wall Street Journal's web site entitled "Fed Maps Exit From Stimulus". Why does this matter? Well, Jon Hilsenrath has telegraphed almost every move the Fed has made over the last several years. He is well known as the Fed's media mouthpiece and known to be close with the Fed. In the article he states, "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy." He also states, "Yet while officials appear increasingly settled on a strategy for how to dial back the program, they haven't decided when to start."

But when he starts talking about the slowing of bond buying by the Fed, you should pay attention. The Fed is sending you a message. Late in the day on Thursday the rumor of the article came out, and the equity markets (SPY, QQQ, DIA, IWM) quickly tanked from the highs of the day to the lows only to be bought back up as people said the rumor was unfounded. Well, it's not, and it may make some bulls nervous over the weekend. Interestingly, the bond market (NYSEARCA:TLT) tanked the last few days as if it knew this Fed action was coming...

Therefore, what should investors and traders do now? I think if you have been purely riding the Fed liquidity wave, you need to reevaluate that strategy. Despite the fact that the Fed is unlikely to stop bond buying altogether anytime soon and I doubt they raise rates for a long time, this is a caution signal from where I sit (especially with the YTD gains in the markets). The market looks forward, and this is a sign that in the future the Fed may be less accommodative. So, if you believe the rally in stocks is based mostly on the Fed, now is the time to start thinking about what a less aggressive Fed might mean. Here's a chart of what has happened when the Fed has stepped off the gas in the past since the financial crisis -- it's not bullish.

I would not be surprised to see this article be the talk of "the Street" over the weekend and on Monday.

Disclosure: I am short SPY, IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I shorted the SPY and IWM after the article came out at 7:30 p.m. ET, but have no intention of holding this position for the longer term.

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