Tuesday's Sea Of Red A Product Of The Fed

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Includes: DIA, IWM, QQQ, SPY
by: Orange Peel Investments

Summary

We think the Fed dropped the ball by not raising rates this month.

The uncertainty surrounding the Fed and the shaken confidence in the Central Bank is adding to the volatility.

Until then, triple digit swings on days like today.

By Parke Shall

Tuesday morning is set to open up significantly red, with European markets leading the charge following Germany's DAX trading down over 3% last night.

We think we have the solution to ending the volatility in the markets, but nobody wants to hear about it. We have written time and time again that the Federal Reserve has officially dropped the ball by not raising interest rates are this month.

Yet again today we watched international markets tumble overnight, and we are setting up for a triple digit open to the downside, as growth in China continues to worry investors. Germany led Europe lower as Volkswagen shares continued to trade lower as a result of their coming emissions scandal.

Now, over the last 6 months, a majority of the world's global markets are all lower.

^GDAXI Chart

^GDAXI data by YCharts

The only way to make sure that you are protected is to make sure that you're hedged. All of the indices have broken technical levels on their charts, finally breaking their long-term uptrends, and now looking like very choppy waters could be ahead.

The problem with the Federal Reserve is that no matter what they do, they should be guiding with a steady hand. They're not giving off that impression.

The job of the Federal Reserve is to ease both booms and bubbles in the capital markets. This requires that investors and institutions have implicit trust and confidence in the Federal Reserve as confidence in our central banks is the main foundation that holds up our economy.

Not unlike China, the Federal Reserve is now being looked at in the US in a dangerous light. It's being viewed as a constituency that yields to the institutions and the very real long bias that says our markets need to be in a perpetual state of rising.

When the Fed looks uneasy or unsure of what it wants to do, like it has for the last year now, that's enough to spook investors and really make the markets volatile.

As we said in a previous article, the longer the Fed puts this off, the worse it's making it.

We are dealing with this by taking some profits in some companies and leaving on some of our long term-focused staple stocks. We are also looking at hedging strategies for what we believe will be more volatility, the likes of which we've seen over the last two months, heading forward. We said that the Federal Reserve needed to get it right this month, and it did not.

It has to be difficult for those in the working class who are looking for yield on their savings. Once again, the people that are doing what they're supposed to do - which is sock away money and save diligently - are getting the short end of the stick so that the Fed can appease the likes of large institutions who continue to want the equity markets to advance, despite many technical indicators and a global economic climate that are telling us that these markets need to take a breather.

As we've stated in the past, the cornerstone of our portfolio is in staple stocks that pay a dividend. We actually don't mind buying these at any given time during any short-term debt cycle because our focus for most of these companies is for the long term. This means when these companies offer their dividends when the equity price is lower, we are getting a shares at a cheaper price then we would be getting otherwise.

We don't mind reinvesting are dividends because our focus is 5 to 10 years at least for a lot of these companies. When you think about the long-term health of the capital markets, we need to think about not just having a long bias. Markets were made to go up and to go down and interest rates are there to be moved according to the economic health of the country and of the global economy. After eight years, we believe the global economy and the US economy has recovered enough so that we can introduce what is really going to be a very small 25 basis point move to the Federal Funds rate.

We don't necessarily think that it's time to sell everything and go all in short, but we do think that we're going to see a correction that brings equities under the 16,000 level.

It's the Fed's choice on how we get there: slow and steady if they raise rates, or volatile and choppy like this morning's opening trading is going to be.

Our plan to weather this storm is to keep a lot of our core holdings and make sure we have leveraged exposure to the short side by using options and getting short select equities and indexes. We're going to look to keep some cash on the sidelines that we can deploy in the case of value stocks getting significantly cheaper.

Until the Federal Reserve comes out and guides rates slightly higher, indicating that the economy is stable and that they are not bought and paid for by those who have an interest in rates staying low, we may not have a stable marketplace. This isn't necessarily a bad thing if you're a derivative trader simply looking for volatility.

But for the buy-and-hold value investors, the retail investors, and all of the associated funds that comprise a large portion of our nation's economy, it is not good news.

We encourage moving to value, and investing cautiously.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.