Wednesday, June 19, 2013
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The optimistic mood in the market about the Fed over the last two
days is showing up in pre-open sentiment for today's session as
well. But the mood may not last all day, particularly in the
afternoon session after the Fed announcement and the Bernanke
press event. Given the level of Fed-centric anxiety and
anticipation in the market, it is perhaps reasonable to expect a
roller-coaster ride the rest of this week, including today.
The prevailing market uncertainty is quite ironic given the
Bernanke Fed's transparency vows. The Fed has been fairly
explicit in what it wanted to see in the economy before it would
think about changing its low interest rate policy. They provided
us with specific targets to that effect about inflation and the
unemployment rate. For example, the Fed wants to see the
unemployment rate drop to 6.5% from the current 7.6% before they
would change their current near-zero interest rate policy.
But they never spelled out the pre-conditions for changing or
rolling back the $85 billion a month bond purchase program. The
only thing mentioned in that context was that they needed to see
'substantial improvement' in the labor market outlook. The Fed
may have a definition of what amounted to 'substantial
improvement', but they never cared to share that with the market.
As a result, while some in the market believe that the labor
market outlook has indeed substantially improved and no longer
needed as much Fed support, others are not willing to concede
that point yet.
We may not get much out of the post-meeting statement this
afternoon, but the Bernanke press conference should help clarify
matters. Consensus expectations are converging on the 'taper'
coming through this fall. But Bernanke doesn't have too long to
articulate his exit vision, with his term at the Fed coming to an
end in a few months time.
Director of Research