All eyes on the Fed Part (I) – positioning ahead of the decision

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The Federal Open Market Committee starts its two day June policy  meeting tomorrow. Although it is unlikely that there will be any immediate specific policy shifts as a result, Ben Bernanke is scheduled to give a press conference on Wednesday in conjunction with the release of the Committee’s statement.  Whatever he says is likely to have a significant bearing on stock markets for the rest of the summer, particularly coming on top of the “taper caper” that has put a brake on markets in recent weeks.

If there is the slightest hint that the Fed is planning to scale back its programme of QE, then expect to see a good deal of selling over the rest of June and July.  The next FOMC meeting after this is in 6 weeks.   

Second-guessing the vacillations of the Fed is almost certainly a fool’s game, but it is something most involved in the market seem totally addicted to. It is a reflection of the strange, distorted times we live in where monetary policy has such a fundamental grip over asset prices.  However, it is the way things are (for now at least!) so we all just have to play along.

As of writing, Dow futures are up about 100 points from Friday’s close at 15,160. I first identified the place to start shorting the Dow at 15,200, about ten days ago.  My view is that a near term top is in place and the next significant move in the market is now likely to be down.  Factoring in last week’s lacklustre trade and disappointing end to the week, combined with a series of recent lower highs (indicated below on the chart), and there is an increasingly compelling case to go short. 

Although I can’t say with any certainty exactly what Bernanke will say or how the market will react to his press conference, it seems a reasonable bet that at the very least the Fed will have started to scale back its efforts by the end of this year.  Given that the stock market is meant to work on a 6 month forecasting time horizon this basic principle fits with my wider view.

If Bernanke confirms the Fed’s commitment to open-ended QE, this could lead to a rally, so I am planning to manage my stops fairly tightly. This said, the market really is starting to look pretty tired.  With the summer coming up and volume expected to be seasonally lower as usual, now seems as good a time as any for market participants to take profits. 

Today’s overnight rise appears to offer a good opportunity to add to any short position although it is important to keep plenty in reserve.

By Ben Turney

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