Waiting on Bernanke, Again

Here we go again.

 

One week from now, all of Wall Street will suffer from Fed-induced paralysis.

 

Next Tuesday, the Federal Reserve Board meets again to determine the fate of interest rates. For several months now, the market has speculated on when the Fed will end its tight money policy. The Fed Funds futures market says they’re done.

 

Just prior to the release of last Friday’s dismal GDP data, the Fed Funds futures market placed the odds of another rate hike at 60%. Today, those odds are below 30%.

 

We won’t know for sure until next Tuesday at 2:15 EST. But there will be plenty of speculation between now and then…

 

It’s tempting to dismiss such speculation as background noise in the larger scheme of things. But investors react to such speculation – so we have to pay attention to it.

 

We’ve seen several strong rallies this year inspired by the idea that the Fed is finally done raising interest rates. And, it’s likely we’ll see at least one more this week as investors jump over themselves to get positioned prior to next Tuesday.

 

In fact, I think the 1,300 level I targeted for the S&P 500 stands a pretty good chance of coming into play this week. Once that target is out of the way, however, and once the Fed decision is off of the table, it’ll be time to change our strategy.

 

It’ll be time to get defensive.

 

There are three sectors that perform extraordinarily well once the Fed stops raising interest rates. Two of the sectors, pharmaceuticals and biotech stocks, are obvious, as they tend to perform well during difficult economic times and stock market downtrends.

 

I’ve been a big fan of large cap pharmaceutical and biotech stocks all year long and it’s nice to see the recent strength in those sectors.

 

I’m also a big fan of the stocks in the third sector. Unlike pharma and biotech, this sector has largely underperformed all year. Until yesterday, that is.

 

Take a look at the action on the following chart…
 

 

On Thursday, I’ll tell you more about this sector and why I think it’s setting up to be the best performing sector for the remainder of 2006.

 

Until then…

 

Best Regards & Good Trading,

 

Jeff Clark

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