Daily Insight

U.S. stocks were able to shake off an ugly housing report and snap a two-day losing streak after Fed Chairman Bernanke stated that it’s necessary to keep the fed funds rate “exceptionally low” in an attempt to spur demand.

Bernanke was on Capitol Hill yesterday providing his semi-annual testimony on the economy and monetary policy, an event officially termed Humphrey-Hawkins testimony although few still call it that these days, and that’s when he reiterated the economy still needs a record-low level of fed funds. That comment reversed a market retreat that had followed the release of new homes sales for January, which we’ll get to below.

Nine of the 10 major industry groups gained ground on the session, led by financial, consumer discretionary and technology shares -- the sole loser on the session being basic material shares.

Basic materials have been down for three sessions now, and the fact that they lost ground again on Wednesday when the overall market was up shows that the mid-session rebound in stocks was all due to the easy-monetary policy trade rather than upbeat sentiment on the potential for economic growth.

Normally, when the Fed reiterates they’ll keep rates at record lows for an extended period commodity-related material stocks are among the leading performers. But people are losing faith in a durable expansion (whether we’re talking global or domestic) and that’s invoking some profit taking within this sector, which has pretty much been in play since mid-January.

I’m not even sure traders want to be buying stocks at this level, but they feel this is the only place to deploy money because of the Fed-induced puny yields within the low-risk sphere – which is precisely a major part of the Fed’s agenda.
Click here to read the rest of this entry.

Brent Vondera, Senior Analyst