Top Advisors Corner

"It's Going to Bounce Back Very Big"

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Trump said this at the White House early Thursday. Yet that is not the topic for today; rather, this post is about the FED and their attempt to calm the markets. Less talky and more action-y than Trump, in essence, the FED believes the same thing.

The ETF LQD Fund's stated objective is "to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds". It's a "risk-on" investment strategy in what is considered to be the safest fixed-income sectors.

This fund gives you exposure to the top corporations that typically do well in a lower interest-rate environment. LQD's top 10 holdings include BlackRock Cash Funds Treasury SL Agency Shares, GE Capital Funding Company, Anheuser-Busch Cos, CVS Health Corps, Goldman Sachs, Verizon, and Abbvie Inc.

I bring this to you today as a rumor circulated that the Fed bought into this fund to inject liquidity into the market and economy. In other words, the FED, assuming low rates or even negative rates are here to stay, bought LQDs to help alleviate the crisis we are currently in. If the FED did indeed buy investment grade bonds, their purchases were met by very eager sellers.

I imagine the FED is in it for the long haul, anticipating that once the virus becomes more manageable, these bonds are the way to go.

But is this the final chapter for the Fed to be careful what they wish for?

The FED also announced $500 billion in 1-month and 3-month repos. They flooded the market with liquidity. This repo will continue every week for the rest of the month. Their balance sheet keeps growing.

Investors are wondering - will this action, along with the real chance the Fed's meeting on the 18th results in zero interest rates, help?

Looking at the weekly chart of LQD, the immediate response is no.

Furthermore, as one who anticipates the even better chance that these repos, purchases of corporate debt, the diminishing supply chain and zero percent interest rates create a stagflationary environment, I feel like today my pawn on the chess board got closer to declaring "Checkmate."

  • S&P 500 (SPY): 235 is the 80-month moving average support. Its not even oversold
  • Russell 2000 (IWM): 112.05 today's low. 124.27 a gap to fill
  • Dow (DIA): 208 the 80-month moving average support
  • Nasdaq (QQQ): So much better shape than the others but still not looking healthy
  • KRE (Regional Banks): It starts with a close over 36.42
  • SMH (Semiconductors): 100 area 2019 low-120 resistance
  • IYT (Transportation): 114.91 2016 low
  • IBB (Biotechnology): 100.56 the 80-month MA pivotal
  • XRT (Retail): Below the 2016 low-35 resistance


Mish Schneider

MarketGauge.com

Director of Trading Research and Education

Mish Schneider
About the author: serves as Director of Trading Education at MarketGauge.com. For nearly 20 years, MarketGauge.com has provided financial information and education to thousands of individuals, as well as to large financial institutions and publications such as Barron’s, Fidelity, ILX Systems, Thomson Reuters and Bank of America. In 2017, MarketWatch, owned by Dow Jones, named Mish one of the top 50 financial people to follow on Twitter. In 2018, Mish was the winner of the Top Stock Pick of the year for RealVision. Learn More
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