ETF Periscope: Reactive Market Responds to Fed’s Mixed Tapering Signal

You must live in the present, launch yourself on every wave, find your eternity in each moment. -- Henry David Thoreau

Well, that party didn’t last long, and the hangover was on the nasty side.

Wall Street had a few days to entertain a little early-week exuberance as a couple of Fed-centric news cycles spurred the equity market towards yet another round of record highs. That exuberance, however, was severely “tapered” when a conflicting message from another Fed officer sent the market reeling towards steep losses, cutting into its midweek gains.

Nonetheless, all three of the major indices were up last week, though Friday’s sharp downward dive sliced off a considerable sum from the collective bottom line.

The Dow Jones Industrial Average (DJIA) gained 0.5% on the week, even after taking into account Friday’s 1.2% loss. That loss, by the way, was the most severe for the Dow in over a month.

The S&P 500 index (SPX) rose 1.3% over the same time frame, while the Nasdaq Composite (COMP) trumped the trio by edging up 1.4%.

The week began with the news that Larry Summers had removed himself from consideration to serve as Ben Bernanke’s replacement as Federal Reserve chairman. An Obama favorite, Summers’ star had dimmed as of late as objections to his potential Fed stewardship emerged from across the political spectrum.

The real death knell for his appointment, however, was probably Wall Street’s objections to his assuming the position as head of the Fed.

Apparently, Summers remained a bit too much of a question mark for the market.

There seemed to be a growing concern that, as a newly-installed Fed chief, he would speed up the process of dismantling the current $85-billion monthly asset-purchase program created by the Fed, designed to inject a robust level of stimulus into the nation’s fragile economy.

Concurrently, support seems to have solidified around current Fed vice-chair Janet Yellen, who is expected to follow more closely in the dovish footsteps of Bernanke. With Summers withdrawal, Yellen certainly must be regarded as the new front-runner for the position.

In any event, last Monday’s market move seemed to indicate that investors concluded that this particular version of musical chairs would bring a slower pace of stimulus withdrawal than the model expected to occur under a “Chairman Summers.”

That version of the story seemed to get confirmed when Bernanke himself held a press conference last Wednesday. There, he announced that “the committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.” 

Fed-speak translation: The bond-buying program would remain intact, at least for the moment. And that’s all that investors needed to hear.

The response was strong and sure, and the SPX hit a new all-time high.

But wait, there’s more to the story.

On Friday, one of the more vocal of the Fed officials, St. Louis Fed president James Bullard, was quoted as saying that a certain degree of tapering could be announced as soon as the next Federal Open Market Committee (FOMC) meeting in October.

Wall Street responded to this bit of news with a spurt of selling, which was finally abated at the chime of the market’s closing bell.

True, a certain amount of the selloff could be attributed to the phenomena known as  the “triple witching hour,” a quarterly event on Wall Street that sees the simultaneous expiration of stock index futures, stock index options, and stock options. This event can result in high levels of market volatility, and when coupled with a powerful news cycle such as Bullard’s comment, the market can easily trend fast and furious.

Friday was a textbook example of this confluence of events.

The question now is how will the market feel on Monday, once it has shrugged off its party hangover and has time to reassess the conflicting comments from out of the mouth of Fed babes.

What the Periscope Sees

Each week, the Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score. The Rankings are revised on a weekly basis.

The rankings for the past week placed the Technology Sector atop the SectorCast ETF Rankings, a spot it has dominated for most of the last several months. Among the sector’s top ten ETFs in terms of assets, FDN (First Trust Dow Jones Internet Index Fund) leads the pack, up 38.57% year-to-date.

Here is a list of FDN’s top ten holdings by percent, which, taken together, represent slightly more than 50% of FDN’s total holdings as of the first week of July, 2013:

1-Google (GOOG):  +9.94%

2-Amazon (AMZN): +7.09%

3-eBay (EBAY): +6.15%

4-Priceline (PCLN): +5.72%

5-Yahoo (YHOO): +4.69%

6-Salesforce (CRM): +3.91%

7-Netflix (NFLX): +3.69%

8-Akami (AKAM): +3.09%

9-Linkdin (LNKD): +3.04%

10-Facebook (FB): 3.01%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. 

ETF Periscope