Fed Continues To Trim

The Fed stuck to their tapering script Wednesday and announced another reduction in the amount of bonds they plan to buy each month. From Bloomberg:

The Federal Reserve will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke's unprecedented easing policy. "Labor market indicators were mixed but on balance showed further improvement," the Federal Open Market Committee (FDTR) said today in a statement following a two-day meeting in Washington.

Cracks Evident On January 23

Leveraging the "power of NOW" has paid dividends in recent sessions. After the close on January 23, we showed the stock (SPY) vs. bond (AGG) chart below as an example of an observable shift in investor behavior. The comment from last week still applies:

The demand for conservative bonds has been increasing relative to growth-oriented stocks. If the chart below morphs into a "2012 correction look", our concerns about stocks will increase.

Below is the same chart updated as of the close on January 29. The trend of increasing concerns about the economy and markets has continued. Since one of the tenets of investment success is remaining highly flexible, we are happy to switch from an incremental risk-reduction strategy to an incremental cash redeployment strategy when the evidence changes.

Turkey's Shock And Not Effective

Turkey's central bank tried a "shock and awe" emergency rate increase Tuesday evening. Unfortunately for the central bank, within hours, the Turkish lira had erased all its post-announcement gains. Another factor in Wednesday's sell-off was the somewhat unrealistic expectation that the Fed might assist the emerging markets in some way. From Reuters:

Stocks had been lower ahead of the announcement amid concerns that bold efforts by Turkey and South Africa to stabilize their currencies may not be enough to staunch a cycle of selling in emerging markets. "I think investors had hoped that the Fed would somehow respond to the recent turbulence and show they had their back," said Jack Ablin, chief investment officer of BMO Private Bank in Chicago. The Fed said it would buy $65 billion in bonds per month starting in February, down from $75 billion now.

Investment Implications - Evidence Needs To Shift

Has the observable evidence been helpful? Yes, the tweet below speaks to risk-reducing moves that were made last week.

As noted Monday, the ball is in the bulls' court short-term; they need to produce observable improvement in the market's risk-reward profile before we can consider a new home for our cash. The NASDAQ (below) is one example of a market that is morphing into a "risk-off" profile.

On the "this is looking better" end of the spectrum, U.S. Treasuries (TLT) have seen improving demand relative to stocks.

Bulls Have Hope Near 1775

Support levels refer to areas where the odds of buyers stepping up are higher. The current stock slide needs buyers to step up before it can end. As shown in the chart below, 1775 may offer some much-needed support.

The chart above is the glass half full perspective. The chart below is the glass half empty perspective. The trendline labeled with A, B, C, D, and F has acted as both support and resistance. The S&P 500 has spent time below the trendline this week and closed below it after the Fed announcement.

We continue to maintain a mix of cash, stocks (SPY), and bonds (AGG). We added to our TLT position for the third time before Wednesday's close. The market will continue to guide us if we are willing to listen.