In the meantime, even the speculation that the Fed is going to cut back (and that's all that it is) is sending reverberations through financial markets. Virtually all the inter market relationships we've tracked since I started this newsletter three years ago are, for now, worthless. The only indicator that works is the value of the Japanese Yen:
Yen up = markets down
Yen down = markets up
Emerging market bonds are taking it on the chin as investors are pulling out of third world debt as the yields on Treasuries become more enticing. Here's a daily chart of the iShares JP Morgan USD Emerging Market Bond Fund:
The fears surrounding the Fed taking its foot off of the gas pedal has upset the FOREX (foreign exchange) as well where capital flows have been skewed as the big money pulls out of more speculative markets in anticipation of getting a higher yield in the U.S.
Volatility is here to stay for the short term and any "squeak" out of Bernanke that there may be a cut back on asset purchases will create an instantaneous air pocket under stocks. But I think that unless the FOMC quarterly forecast is more optimistic than market participants anticipate, Wednesday's events will come and go and no one will know anything more than they know now.
Since the market hates indecision there may be more volatility unless Bernanke soothes the markets with dovish talk. I do expect he will do this because I believe the Fed is not happy with the recent market volatility and the speculation surrounding the central bank's next move.
Putting it all in perspective, this market is afraid like a five year old child is afraid when his/her father suggests taking off the training wheels to the bicycle. Once this market sees it's way through this fear I believe it will be "off to the races" as we are in the infancy of a secular bull market that can be compared to the 1982 - 2000 bull market.
I may post again as time allows but this will be my last commentary for at least two weeks as I have other business matters to attend to.
Have a great week!