Financial Professionals




The S&P 500® Index (SPX) traced a rather ugly intraday reversal on Wednesday.  Just before 10:30 a.m. the SPX traded +1.08% higher on the day to another historic high at 1687.18. However, after the April 30-May 1 FOMC minutes were released, the SPX reversed lower to close down on the day by (-.83%) at 1655.35. There is already much speculation that Wednesday’s price action is the beginning of a much deeper decline. Some are even suggesting a new secular peak has been put in place, similar to 2000 or 2007.

After a day like yesterday, I expect proper reflection is needed to determine if any significant portfolio changes are warranted. The single most important indicator I suggest relying on is “follow through”. By that I mean, where is the market, not tomorrow morning but in a week, or even better, after Friday, June 7 – the next U.S. labor report day.

Let me provide some context. The culprit for yesterday’s sell-off appears to be fears for the removal or tapering of the Fed’s $85 billion per month asset purchase program. For those frequent readers of my blogs, you know my expectation; I do not expect that to occur at the June meeting. But let’s remove my expectation for a moment.

There have been three previous FOMC minutes released in 2013. In each of those instances the SPX traded negatively in the wake of the releases. At this point there is not much commentary the FOMC can provide that the market will react bullishly to. In each of those three instances, relying on “follow through” proved to be the most accurate indicator as to whether investors should make portfolio changes.

January 3, 2013 FOMC Minute Release = 5 Days of Disappointing Trade

Source: Bloomberg

February 20, 2013 FOMC Minute Release = 4 Days of Disappointing Trade

Source: Bloomberg

April 10, 2013 FOMC Minute Release = 6 Days of Disappointing Trade

Source: Bloomberg

Let’s assume I am wrong and the SPX begins to aggressively decline in the next few days. My May 9 “Updated SPX Technical Formation” blog provided a critical SPX point of reference at 1597.35, where prudence dictates investors reduce allocations. A close below 1597.35 supersedes waiting on how the SPX “follows through” post-FOMC minutes release. Unless the 1597.35 level is violated, I am willing to wait and observe trading over the next few weeks. Fundamentally, the type of acceleration in U.S. economic growth that would warrant a reduction FOMC stimulus is just not evident.


Some other observations after today’s trade to consider…


  • “Sell Treasuries in May and Go Away” has returned nearly +14% month to date.


  • “Sell Equities in May and Go Away” would not allow participation in the current SPX month-to-date return of +5.1%.


  • I still cannot find the evidence to suggest increasing exposure to commodities and basic materials, both currently at underweight and still in a position of vulnerability.


  • Financials, as reflected by the XLF, have returned a sector-leading +8.5% this month. Continue to focus on this sector first and foremost as a source of opportunity during SPX corrections.


  • The continued strength of the U.S. dollar, now trading at its highest level since July 2010, highlights the presence of global deflation.


  • Continued U.S. dollar strength will challenge emerging market indices’ ability to reverse this year’s significant underperformance.  

U.S. Dollar, May 2008 to May 2013

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.