taper on, taper off, taper on: what to do?


Months ago, the Fed hinted that it was warming up to start on the long road to money policy normality.  No, it had no intention of raising interest rates from the current level of zero (the plan is to start in 2015)   …but it would soon begin to “taper” the size of the extra money it is regularly pumping into the economy at the rate of $85 billion a month.

The consensus expectation was that the Fed would officially announce the start of tapering, and the size of the initial reduction ($10 billion less?), last Wednesday.  Instead, the Fed said it would prefer to wait for more positive economic news and was going to do nothing.

The S&P rallied by 1.5% in the minutes after the news broke.

It gave back all but .2% of the advance when Fed officials clarified that all they meant to convey was that tapering will probably begin next month.

what to make of Wednesday-Friday trading

In one sense, the large market moves are just typical short-term trader craziness.  As individual investors with a longer time horizon, we can’t allow ourselves to be distracted from the fundamental fact that we are now entering a period of rising interest rates.  So we should basically ignore what’s going on.

In another, however, a sharp swing in short-term sentiment like this, followed by a reversal, may give us a look at more permanent patterns in market money flow that might otherwise remain below the surface.

what to do

Take your equity portfolio, stock by stock, and look a how each issue performed over the three-day period.

This is relatively easy to do if you have the tickers for your stocks entered into a service like Google Finance  (the one I use, even though Yahoo Finance charts are better).  Just right-click on the ticker to open the stock chart in a new tab, set the chart to the past three days and compare the stock to the S&P.

If a stock outperformed when the market was going up and also when it was going down, that’s a good sign.

If the stock outperformed during one period and underperfomed during the other, and it ended up more or less unchanged, you have no information.  A big net plus is good; a big net minus is bad.

If the stock underperformed when people were bullish and underperformed again when people were bearish, that’s a reason to rethink whether the positive investment case for the stock remains intact.  The stock may well be perfectly fine, but this is a red flag.

the overall market

To give you some context for thinking about last week, over the three days only on S&P sector, Telecom (the smallest sector) lost ground.  The stars of the index were:

Utilities (also a small sector)          +1.1%

IT          +.8%

Consumer discretionary          +.5%

Growth stocks (as measured by the Russell 1000 Growth index) gained .6%.  Value stocks (Russell 1000 Value) were flat.

Small stocks (Russell 2000) marginally underperformed large (Russell 1000).


Among my holdings, WYNN and LOW were up, GIL and HOG were down.  I’m a little surprised about LOW, since it should be very sensitive to rising interest rates.  I’m slightly concerned about HOG, but only because I would have guessed it would be an outperformer, but for now I’m just going to put it on a somewhat shorter leash.



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