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Let’s Twist Again…

“Like we did last summer…”  That song lyric may as well be Ben Bernanke’s theme song.  Well the data so far this week suggests that the Federal Reserve will continue their policy called “The Twist.”  If you are not familiar with this policy, it is when the Fed sells short term Treasuries and buys longer term bonds.  They do this to drive down the longer term interest rates and stimulate the economy.  With this week’s data and the subsequent reaction in the markets, the Fed may have more of an opening to exercise QE3.

Last Monday, the US Manufacturing activity dropped unexpectedly to the lowest levels since July 2009.  The manufacturing index measured by the Institute for Supply Management, dropped to 49.7 from 53.5.  Typically, when the index falls below 50, it indicates contraction in the economy.  If the index were to fall below 47 it usually signals recession.

On Thursday, the ADP employment number was released.  This is sometimes used as a preview for the US unemployment number released on Friday. The number was good, (179k new jobs vs. 105k expected), but continuing claims rose more than expected putting a damper on trading for the day.

Looking at the recent rise in stock prices, it is not being fueled by buying in the sectors that you would expect in a sustainable bull market.  In fact, the opposite is true.  The defensive sectors have been the best performers.

To learn more on the sector rotation and how it can affect your trading and or investing, view the Hour with the Pros by Chuck Fulkerson from May 5th, 2011.  The Hour with the Pros is a webinar that is viewable live and via recorded sessions to all Online Trading Academy graduates.

When the market is being led by a flight to safety, it usually preceded a drop in the equity markets.  So what does this mean for the investor/trader?  Well we are entering the summer doldrums for the NASDAQ.  The weak data and response to the data in the markets may suggest that we should hone our shorting skills but keep out stops tight, as the Fed may act to prop up the markets.  This is especially true in an election year.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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