US stock futures are basically flat Wednesday morning as investors wait for the announcement from the two-day FOMC meeting today. The Fed is expected to enact something called ‘Operation Twist’ a tactic of selling short term debt and buying longer-term debt in order to bend the yield curve and hopefully keep borrowing costs low. With the Fed Funds rate still sitting at 0, the central bank has had to get creative in order to find ways to try to stimulate the economy. Look out for the announcement at 2:15pm ET.
Obviously the big question for traders is: how will the market react to ‘Operation Twist’? The infamous QE2 sparked a 7-month rally that saw few significant corrections, but over the course of a week at the beginning of August, nearly all of those gains were wiped out. It definitely seems reasonable that the market will not react as kindly to another round of stimulus given the ramifications of the last go-round. After a week long run up could we be in for a ‘buy the rumor, sell the news’ type scenario?
The other major headline investors are focusing on is Europe, and more specifically Greece. With large coupon payments due this week, Greece has been forced into talks with its European counterparts over another tranche of aid. At each turn, leaders and representatives from the “Troika” have noted progress in the discussions, but an accord has not yet been met. European markets were green earlier in their trading sessions, but have begun to unravel to the lack of a deal. The bond markets are still telling investors that a Greek default seems to be inevitable.
From a stock specific standpoint, continue to narrow your focus onto sectors showing relative strength and weakness. If you want to buy the dips in the market, focus on the big cap tech leaders like Apple (AAPL) and Amazon.com (AMZN). AMZN was leading the pack for most of last week, but this week AAPL has been the strongest stock on our board. The stock exploded Monday despite a down market and extended significantly higher again yesterday before pulling in sharply with the rest of the market. Even at $400+ AAPL remains fundamentally undervalued.
On the flip side, banks continue to act weak. Last week they got a temporary boost when world central banks announced a coordinated effort to shore up the capital base of select troubled European banks. However, the move was a basic admission that a crisis could be imminent, and a Greek default would put significant pressure on banks. Look to short banks on market weakness, or even potentially playing an inverse ETF like FAZ long if you have the risk appetite.
In earnings news, a coal stock we often watch, Walter Energy (WLT) missed badly on EPS and is trading 11% lower. WLT had seen a run-up recently due to takeover speculation, but the numbers rule and it’s a harsh reality for WLT investors.
By: John Darsie
Disclosure: No positions