FED ANNOUNCES MILD BOND TAPERING STARTING IN JANUARY -- BUT OFFERS ASSURANCE THAT SHORT-TERM RATES WILL STAY DOWN -- STOCKS RALLY SHAPLY ON THE NEWS -- LENNAR LEADS HOMEBUILDERS HIGHER -- VIX TUMBLES AS STOCKS SURGE
FED REDUCES BOND PURCHASES BY 10 BILLION IN JANUARY... Well, it finally happened. The Fed today announced that it would start reducing its monthly bond purchases from $85 to $75 billion starting in January. It also reassured investors, however, that short-term rates would still stay near current levels for the foreseeable future -- well after the unemployment rate fell below 6.5% and inflation exceeded 2%. Judging from today's market reactions, the Fed approach worked. After an initial negative reaction, stocks rebounded sharply. After spiking higher initially, bond yields are trading only modestly higher. An early jump in the dollar also evaporated, and gold prices rebounded. Stock ETFs in foreign developed and emerging markets also experienced upside reversals. U.S. stock indexes also bounced off important support levels. Chart 1 shows the Dow Industrials climbing sharply after a successful test of its mid-September peak and 50-day moving average. Chart 2 shows the S&P 500 scoring an upside reversal day off its 50-day line as well.
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Chart 1
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Chart 2
LENNAR LEADS HOMEBUILDERS HIGHER... Interest rate groups -- like REITs and utilities -- bounced sharply today on the muted bond reaction to the Fed announcement. So did homebuilders which were one of the day's strongest groups. They were also helped by the strongest housing starts in five years. Chart 3 shows the Dow Jones U.S. Home Construction iShares (ITB) surging on strong volume. The ETF has been forming a basing pattern since June and appears ready to break out to the upside. To accomplish that, it needs to close above its September/December highs. Lennar (LEN) also happened to be the biggest percentage gainer in a strong S&P 500. Chart 4 shows Lennar surging more than 6% (on strong volume) and trading above its 200-day average (red line) for the first time since June. The homebuilding leader can achieve an upside breakout by clearing resistance at its September and December intra-day highs at 37.79.
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Chart 3
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Chart 4
VIX TUMBLES ... Another sign that stocks liked today's Fed announcement came from the CBOE Volatility (VIX) Index. Chart 5 shows the VIX tumbling 12% after the Fed announcement. Prior to that, the VIX had risen mildly as traders took on "put" protection against their stock holdings. [A "put" protects against a downturn in prices]. Those put positions were liquidated as the day went on and the VIX tumbled. That reflects a huge sigh of relief that the process of unwinding the five-year program of quantitative easing has finally begun (it started at the end of 2008). The fact that the tapering reflects stronger economic conditions has also made the modest Fed move easier to take. While it's usually dangerous to read too much into one day's trading, today's Fed move was expected to happen sometime between December and next March. My guess is that the markets like the fact that some of the uncertainty has finally been removed. The fact that the second half of December is usually strong also provides a tailwind for the stock market which should carry into the new year.
