Fed Speak - What Does It Mean?

Includes: SPY, USO
by: Brian Kahn

I wanted to wait a day to digest yesterday's Federal Reserve statement. I always print it out and keep it in a folder so I can see what has changed from meeting to meeting within the language. After all, one word added or deleted can make all the difference.

Within this statement, we see some "encouraging" words such as: "The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." Now you can see why I put "encouraging" in parenthesis. Each week we receive data on the employment front. This week, we received more proof that the employment picture is puttering along (at best) through the weekly initial jobless claims. Add to that a poor Philadelphia Fed number and you have about 12 weeks of under-performing data. We are only 10 trading days away from the next monthly employment report. We vastly underperformed last month and I don't think anyone will be happy with the next one given the uptrend in our weekly initial jobless claims data. Therefore, if you were an incumbent in our nation's capital, you are probably looking at that statement very closely and hoping that things are bad enough on the jobs front that more "stimulus" is in the works.

Let's now move into some technical data. The SPX moved from a high of 1415 on May 1st to a low of 1266 on June 4th. If you remember, the employment report that I referred to above, was on the 1st of June and interestingly enough, we bottomed the very next trading day. Not only did we bottom, but we rallied very steeply to 1362 (a 61% retracement for you Fibonacci Retracement lovers).

Why the steep retracement as economic data continues to underperform? My opinion? Quantitative Easing. So now that we bounced 7.5% off the low at 1266 and the poor data pours in, is it a place to lighten up your long position or take profits if you were involved in the recent run? Some investors like to buy protection to stay fully invested using a myriad of "hedge-like" strategies.

Even bigger though is the next oversold area. The Fed has told us they are monitoring the data even more closely than I am. That tells me that fundamentally and technically oversold areas are buying opportunities.

One such ETF that is still moving down and approaching more attractive levels is oil. It is now below $80.00 a barrel (which is great for consumers pocketbooks), but only because economic growth is finally starting to slow. The United States Oil Fund LP (NYSEARCA:USO), is now off 26% from its May 1st high. I think that oil prices become attractive in the mid 70s.

I do believe that economic data have more downside potential and that keeps the Fed involved. If that is the case, based on the last rally we had off the 1266 low, I am looking for a similar buying opportunity to appear again. It just comes down to what sector, what stock and what price to buy in.

Here's hoping to the perfect balance of a not too slow global growth scenario and a Fed that is forced to act. Could that be the "Goldilock's Scenario" so many investors (and politicians) are banking on?

Invest Intelligently


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