Prior to last week, Chairman Bernanke (and the rest of the FOMC) was being criticized for just about anything that was assumed to be wrong with the markets. Now, with the changing of a few words in the policy statement and some very far reaching interpretations by the “One and Done” crowd - he appears to have gone from zero to hero. Wasn’t that easy?!?

Here are the changes that I saw:
For the first time in 3 years, the Fed declined to offer any explicit guidance to its monetary policy intentions. Out went the phrase “the committee judges that some further tightening may yet be needed” and in went a nebulous discussion of its economic forecast. They still mentioned the risk of inflation but gave hope to the hopeful by saying that “the moderation in growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risks remain”. The statement went on to say that the “extent and timing of any additional firming” would be determined by new information from yet to be received data. They also switched the phrase “any additional firming” in policy for “some further firming,” which seemed to really get people enthused. This change in language was broadly interpreted as a signal that the Fed is less certain about its next steps than the market thought it was.

Frankly, I don’t think much changed - they seemed confused before and they seem confused now. It’s always been said that “the market hates uncertainty,” and yet, it appears that this is an exception. Based upon Thursday’s reaction, the market now loves an uncertain Fed. Sometimes dreams are better than reality, but here’s what actually happened - rates went up 25 basis points (again), the Fed hasn’t said they are done (again) and they said they are reliant on future economic data (again). Nothing new there, and they certainly didn’t take the preemptive step of a 50 bps hike and an explicit statement of a pause at the next meeting that some were hoping for. However, the bulls finally got enough wording changes to spin this into “certainty” of a “possibility” to an end in rate hikes. I do have to give credit to the “One and Done” crowd - they didn’t give up despite all the previous failures.

We now have two months until the next meeting and I expect that there will be a great effort to interpret the economic data points as a support to an end in rates. As I have previously written, I don’t place much weight on what the Fed does, but since the majority of investors seem to be infatuated with it, I am going to play along - at least for a little while. I have been resisting the temptation to jump on board the summer rally train. Last week I talked about having a slow trigger finger and as a result, I got shot in the ass a few times. The reaction to the FOMC was significant, so I am not going to ignore it. Personally - I don’t trust it and I don’t like it. But Hedgefolios isn’t about what I like, it’s about what the market likes and where I think individual stocks and ETFs are heading. This week, I converted 335 stock signals to UP versus only 19 new DOWN signals. With a little more positive movement, I don’t doubt that I will have a similar situation with next week’s stock signal changes. Note that I changed 75 ETF signals to UP. One of the things I had been looking for was a massive surge in ETFs as a rapid way for investors to get back into a bullish frame of mind and that is what I saw last week. For the near term, I will be very sensitive to changes in the ETF technicals and expect that there will be increased turnover in this area. If I see deterioration, I will not hesitate to reverse course. I think it’s going to be a bumpy ride but from the significant improvement to the Hedgefolios Timing Indicator, I am hesitantly leaning towards a bullish move.