The Fed Surprise

There isn’t much away from what the Fed does—not earnings, economic data, or the price of widgets—that matter to investors over the past 7+ years.

Wednesday Fed Minutes were released from the most recent meeting and they surprised investors as members were poised to raise interest rates at the June meeting if the gods and conditions permitted.

Markets were higher before this release but this news caused markets to sell-off slightly. In fact, the news allowed financials and bank sectors to soar given higher interest rates would help the sector. Given the higher weight financials carry on indexes markets only fell to unchanged for the most part. Bottom line, the sizable increase in financials was misleading overall given large declines in other sectors.

But commodities (precious metals, crude oil and so forth) declined given the negative impact higher interest rates typically imply. The dollar was also stronger as higher interest rates would attract yield hungry investors.

Sectors that rose included small caps, biotech and tech sectors. Why? The generally rally since higher interest rates attract investors to higher PE sectors where risks and growth are higher. 

A feature of the past two weeks, and more, is the two-way action with a low volume short squeeze followed by a higher volume round of selling. This means confusion, especially for chartists like myself.

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red). Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

Volume rose sharply on Fed release and breadth per the WSJ was negative especially when the Money Flow is viewed.

Chart Of The Day

Without question there’s confusion aplenty.

Clearly higher interest rates would throw markets off. After all the last interest rate highe was last fall. Since then, markets have become unstable. Clearly the Fed wants to raise interest rates but are stuck by the box they’ve put themselves in—staying too long with low rates.