I don’t know about you, but I am awfully reflective for a Thursday. I am remembering all the way back to yesterday when I wrote, “At the hump in the week and the market is flat. The VIX is in a nice, easy place, say in the mid-14 zone. The S&P 500 and DIJA are floating around the zero line. My trades are mixed; some are up and some are down …” I am thinking about the sentiment of that moment, how relaxed the market seemed and the reason I am reflecting on that is this morning I read,

  • The markets got a shaking on Wednesday. And, it could get worse.

OMG. Head for the hills, the only place it will be safe, or so the hilltop screamers tell us. “The rates will rise, the rates will rise” they warn sternly. “The market cannot stand on its own. It is artificially propped up by Fed policy,” they say with fervor, passion, and deep belief.

  • Federal Reserve Chair Janet Yellen shook the markets by implying there could be as little as just six months between the end of the Fed’s monetary stimulus and an increase in interest rates.

Only six months to the end of the market? What shall I do, what shall we all do? Quick! Get out now while there is still some profit to take!

  • U.S. stocks dipped at the open on Thursday as investors continued to digest comments from Federal Reserve Chair Janet Yellen, who raised the specter of an earlier-than-expected hike in interest rates.

Hurry! The market is falling! The market is … What? The market reversed this morning? It is pushing hard into the green? How can that be?

Once again, the “news” is giving the hilltop screamers a platform from which to scream because nothing sells the market news like the Fed telling us it is going to lower its monthly treasury purchases by another ten billion dollars. Each time the Fed has announced this, the “news” has sold it, the market has freaked out, and then the market collected itself. This time will be no different, even if the Fed has added a bonus fear – they will push rates up in 2015 most likely.

These two things – the end of QE and rising interest rates – are inevitable and, ultimately, good for the market. Consider what happened last fall when interest rates rose.

  • Interest rates bottomed out on around May 1 [2013] with the 10-year Treasury note yielding just 1.66 percent. As of Nov. 11 [2013], the yield had risen to 2.75 percent. How did stocks do in this period? The S&P 500 rose from 1,583 on May 1 to close at 1,772 on Monday. Even excluding dividends, that’s a gain of almost 12 percent.

Consider as well that the Fed also began its announced policy of withdrawing QE to the tune of $10 billion per month in December. How has the market performed since then? Well, the S&P 500 closed at 1800 (28 points higher) on 12/2/2013 and it hit a high of 1883 (111 points higher) on 3/7 2014. Today, it is hanging around 1866 and that with the double whammy announcement from the Fed.

Consider also a longer-term study by Rob Brown on the effect of rising interest rates on the market.

  • Since 1865, we have experienced 30 economic expansions, not including the current period of growth. The shortest of these expansionary phases lasted 10 months. For this reason, Brown selected the 10-month window within each growth period during which interest rates rose the most, and he used the yield on the 10-year constant-maturity U.S. Treasury bond. Brown found:
  • The median return for all 10-month windows when interest rates rose the most was 7.9 percent, compared to the median of all possible 10-month windows of 8.9 percent.
  • Eighty percent of 10-month windows of the greatest interest rate increase delivered positive stock market returns. In contrast, only 72 percent of all possible 10-month windows generated positive S&P returns.
  • http://www.fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html

For more detail and facts, go to the study itself (see the link above), but in the meantime, please don’t follow those financial “gurus” and other such supposed bright folk who profess conventional wisdom about rising interest rates. Remember, history is replete with really smart folk who told everyone about conventional wisdom.

  • We can define “conventional wisdom” as ideas that have become so ingrained in how people think that few ever question them. But millions believing in an idea – that the earth is flat, for instance – doesn’t make it true.

I am also reflecting today on my fuel cell plays. Yesterday, I also wrote, “It appears my fuel-cell strategy is played out, at least for the near term.” Maybe I was wrong about that. Two of my plays dropped low enough to pick off my buys and both are showing a profit for me this morning. The question is: do I sell with small profit now, or wait to see if they accelerate again? I will let you know tomorrow what I decide.

Trade in the day; Invest in your life …

Trader Ed