Page 491 - THE MARKET WHISPERER

THE MARKET WHISPERER 48 7

restrains other economic activities such as investment and consumerism.
By contrast, when it drops interest rates, it decreases saving and encourages
economic activities in the marketplace. The Federal Reserve’s interest
policy determines the medium and long-term value of investments and
savings, and is therefore very important to all participants involved in the

stock market.

A week of trading in which an interest rate decision is announced

is usually a week in which the market shows agitation, since many

professional traders choose to “sit on their hands” rather than trade close
to announcement time. Once the announcement is publicized, the market
goes mad! Immediately following the announcement, the market will

usually move in three sharp waves of completely unpredictable directions.

Those who care about their money do not usually try to ride these waves.
Unlike market direction, which is unforeseeable immediately following

the interest decision, the interest rate set by the FOMC is generally very
predictable. So what causes such erratic behavior in the market if the

interest rate can be fairly well predicted? The announcement’s formulation:

how it is worded is no less important than the actual decision on the

interest rate. Reading the announcement enables an understanding of

probable future interest rate changes and the economic mood as expected

by the committee members. We can conclude that the wording of the

announcement, rather than the interest rate itself, is what causes market

agitation.

What should we do on interest rate decision day? Generally, we trade

only during the first two hours. After that we can expect the market to
remain static until the announcement, always given at 2:15 PM, New York
time. The high volatility thereafter is usually “too much too late.” Before the
announcement, exit all trades currently showing prices close to your stop

loss. The probability is high that the volatility caused by the announcement

will send your stocks up and down so wildly that your stop orders will be

executed even if those stocks eventually do move in the right direction.

End of Quarter Window Dressing

Reliable fund and money managers handling the public’s finances must

announce the results of their investment actions at the end of each quarter.

Among a variety of data are two items of particular importance: the list of
stocks in which the fund invests, and yields of those investments. But the
managers want to present a rosy picture to investors, so they tend to do