The main focus of most market watchers this week will, of course, be the Fed. The FOMC begins their meeting on Tuesday, and a press conference by Chair Janet Yellen will follow on Wednesday afternoon. There are a lot of questions that will be addressed at that news conference, ranging from the personal (will she or won’t she be offered another term, and if so will she accept?) to the practical question as to how and when the Committee proposes to begin the potentially dangerous process of balance sheet reduction.
Then there is the biggest question of all: What will the Fed say about their plans for interest rates?
When analyzing markets, traders and investors are usually better served by opposing conventional wisdom than following it, but with the Fed it is a different story. Their actions are well telegraphed these days, and the factors that influence their thinking are well known. Inflation, which is stubbornly low, and the unemployment rate, now fully recovered from the recession, are sending mixed messages.
The deciding factor this time around is forecast to be the drag on the economy from the hurricanes, leading to a consensus view that there will be neither a rate hike this week nor any clear indication of one later in the year. If that is the case, the focus will shift to the so called “dots,” the committee members’ predictions for the longer-term path of interest rates.
As interesting as all this is in an intellectual sense, my dealing room background leads to one question only. If things are going to be “as expected,” how can I position myself to profit with a minimal amount of risk?
The answer this week seems to be in the homebuilding sector.
There are a whole host of other data points due out this week for homebuilding, and in this case, the more usual tactic of opposing conventional wisdom look like the best bet for traders. The effects of the hurricanes will no doubt be seen in both the housing market index this morning and the housing starts number tomorrow, but recent weakness in the sector in anticipation of that should limit the downside to buying something like the SPDR Homebuilders ETF (XHB) while offering the chance of an upside surprise.
While the short-term case for buying XHB rests on the expectations for the industry specific data early this week, it is the potential long-term effects of the Fed’s announcement and press conference that could provide the big payoff.
It is expected that Janet Yellen will say either in the statement or subsequent press conference that hurricanes and persistently low inflation will make another hike this year unlikely. Logically, low interest rates, and even more so the prospect of that situation continuing for some time, will give housing another boost, and XHB would benefit from that over the coming weeks and months.
Whatever happens, it looks to be an interesting week. Yellen’s press conference will be the highlight, but the housing data and Thursday’s leading indicators will add context to whatever the Fed decides and should therefore also be watched closely. With that amount of news out, I would suggest keeping positions to a minimum this week until the picture is clearer, but buying XHB as a long-term play on sustained growth looks like a reasonable trade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.