Sunday, December 15, 2013

The Week Ahead: Hamlet on the Potomac

The year's last meeting of the Federal Open Market Committee will dominate the week. There are other major reports, but they will assume importance, I suspect, only as elements to feed the fine art Fed-Watching.

The FOMC announcement will issued at 2 p.m. New York time on Wednesday, along with forecasts from committee members. Chairman Bernanke's news conference begins at 2:30 p.m.

The Fed is said to be on the cusp of a decision to slow its stimulus of the economy. Whether the decision will come this meeting is anyone's guess. My guess is not, for these reasons:

  • Such major decisions tend to happen at the major meetings that have news conferences. 
  • The next of those is in March.
  • Bernanke's term expires Jan. 31.
  • The new Fed chair, Janet Yellen, will be in charge for the next major Fed meeting.
  • It makes sense, as a matter of bureaucratic courtesy, for Bernanke and the committee to defer any decision until Mrs. Yellen has taken over.
But it's labeled a guess for good reason. Despite my arguments against easing now, I have a vision of Chairman Bernanke standing in front of his colleagues in the Fed's 56-foot-long boardroom declaiming, in full Hamlet mode: "To ease, or not to ease. That is the question."

(Update 12/18/2013: The Fed decided to cut back on the economic stimulus; my guess was wrong. The Fed statement is here.)

The major reports feeding into the Fed news this week are industrial production at 9:15 a.m. on Monday, the consumer price index at 8:30 a.m. on Tuesday and housing starts at 8:30 a.m. on Wednesday.

Following the meeting comes the third version of gross domestic product for the 3rd quarter, at 8:30 a.m. on Friday. No surprise mean no big deal; big surprise means big deal. The prior version put 3rd quarter GDP at 3.6%.

Two other major reports, less directly connected to Fed decision making, are on Thursday at 10 a.m.: The Philadelphia Federal Reserve survey of business conditions in the mid-Atlantic states, and existing home sales, which is the greater part of the home-sales market.

Friday is a quadruple witching day in the markets, the one day per quarter when stock index futures and options and individual stock futures and options all expire on the same day, adding to the potential for higher volatility.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Building permits for new private homes from housing starts, at 8:30 a.m. Wednesday.

The leading index report is a compilation of leading indicators, although not a leading indicator itself. I find it to be useful in setting the context within which I trade. It will be released at 10 a.m. Thursday.

Other reports of interest:

Monday: Empire State manufacturing survey and productivity and costs at 8:30 a.m., the Purchasing Managers manufacturing index flash report just before 9 a.m., and the Treasury international capital report on foreign money flows into and out of the U.S., at 9 a.m.

Tuesday: The Home Builders housing market index at 10 a.m.

Wednesday: Petroleum inventories at 10:30 a.m.

Fedsters

The Fed glitterati are silent this week, yielding the spotlight to Chairman Bernanke and his news conference at 2:30 p.m. Wednesday, and to the collective voice of the FOMC. (I almost wrote "collective wisdom", but -- really?)

Analytical universe

This week I shall be analyzing new bull and bear signals among 2,347 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading January options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading March options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading!

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