It’s All About Considerable Time

Bottom Line—It’s About “Considerable Time”

If there was one specific reason stocks have traded “heavy” for over a week now (Friday’s rally aside), it’s Fed expectations.  This market remains Fed-dominated, plain and simple.  And, levels of Fed angst are slowly on the rise as we near the Sept. 17 FOMC meeting.

In particular, there is the worry that the Fed will remove the term “considerable time” from the official statement.  This “considerable time” pertains to when the Fed will raise rates after QE stops this October.    So, the current statement says the Fed won’t raise rates for a “considerable time” after QE ends in October.

But, quietly there has been a movement gaining steam in the FOMC to remove that phrase from the statement. If that happens next Wednesday, it’ll be taken as mildly “hawkish” because logically markets will assume rates will rise sooner than later.

That growing expectation, along with the apparent break in the European bond buying fever, is what’s weighing on Treasuries and stocks—and it underscores a very important point.

If we are in for a sell off/correction of some sort, then it likely will come with both stocks and bonds going down—so the expectation that even if stocks drop we can hide in bonds will no longer be valid in the short term  – assuming this bond rally of 2014 really has broken (which I believe it has).

Bottom line is you have to respect this rally, but this market continues to feel heavy to me.  I would not be adding any new long exposure here.  JNK continues to be under pressure (down again yesterday and well below 41.00) and I maintain that is a leading indicator, and because there are so many “late longs” in this market that begrudgingly added long exposure during the last three weeks, the potential for a very ugly day between now and the FOMC meeting next Wednesday is on the rise.