'Fed Trade' Is Melting the Snowball

 | Jun 24, 2013 | 3:00 PM EDT
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If there were any doubts that the Federal Reserve had a hand in the market, those doubts have been erased. One never knows how the market will the end the day, but it appears that the market is picking up right where it left off last week. Over the past five days, the S&P is down by nearly 4% and the selling seems set to continue.

What you are seeing is simply the Fed trade underway. The selling is a liquidation of the all the "snowball effect" buying over the past couple of years due to quantitative easing. As a scientist might say, every action has an equal and opposite reaction. Thankfully, this selling won't take us back to the days of 2009 -- at least I hope not. The economy is clearly in much better shape, banks are healthier and have spent the past couple of years strengthening balance sheets and the housing market is stabilizing.

The fear that rising rates will hurt housing is indeed warranted, but the Fed has stated its intent to keep a close eye on things. Nonetheless, even 6%, 30-year fixed rates are still very economical.

What we have going on is purely a technical trade that is trying to liquidate ahead of the Federal Reserve's intent to reverse its security-buying activities. The market is "selling now and acting later." We've seen this story play out before: Sell now and if the economy improves better than expected, buyers will come back in.

If you have been buying all kinds of stocks and enjoying the ride up, then perhaps the best course of action is to sell on the way down -- as your reason for buying has now come into question. On the other hand, if you have been have been keeping some of your portfolio in boring old cash, perhaps the opportunity will come sooner than you think to get in on some attractive prices.

This morning, Apple (AAPL) shares were yielding 3%. The yield could go to 3.5%, if not higher. For those interested in turnarounds, JCPenny (JCP) is back down at prices below where George Soros bought. Potash Corp (POT), the largest fertilizer company in the world now yields 3.7% trading near a 52-week low. General Motors (GM), despite continued strength in new auto demand, could see shares fall back below $30.  

Indiscriminate selling cares nothing for value or quality. Now is the time to be refreshing the watch list and taking advantage of any price-to-value dislocations that Mr. Market may serve over the next few weeks and months.

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