Fed Optimism Lifts Financial ETFs

December 18, 2000
Loren Fleckenstein

The financial-focused tradable funds outperformed Monday as the market discounted
a greater likelihood that the Federal Reserve will shift to
an easing bias, setting the stage for actual cuts in the federal funds interest
rate. Some observers think the Fed might lower the rate on Tuesday.

The Regional Banking HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating) rose 4.4%, the day’s biggest gain among
the U.S.-focused exchange-traded
funds.Â

For my technical take on U.S.
Bancorp’s cup-with-handle breakout, see my Trading
The News commentary.

Behind this action are growing
perceptions that the Fed will start cutting rates sooner than expected. For more
on this angle, note the trading action in the fed funds futures contract,
described in Marc Dupee’s Futures
Market Recap. To learn how I and other traders use the fed funds
futures market to forecast Fed rate policy, see my tutorial, Forecasting
The Fed With Fed Funds Futures.

The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field,
a blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.

Exchange-traded funds combine traits
of stocks and mutual funds. Like mutual funds, an ETF represents diversified
ownership in a number of different stocks, greatly reducing company-specific
risk. Like stocks, ETFs trade on exchanges, nearly all of them, in fact, trade on
the American Stock Exchange at present. They quote throughout the day, enabling
traders to take advantage of intraday price moves.

If you’re new to exchange-traded funds,
be sure to visit TradingMarkets’ Knowledge Center,
dedicated to explaining the basics of trading and active investing in ETFs and
mutual funds. Just click on the Funds tab
near the top of this page, then click on the Knowledge
Center tab.Â

You also will find lessons on trading
exchange-traded funds in the Stocks Education area of TradingMarkets.com. In
particular, check out my three-part series on trading ETFs, starting with href=”/.site/stocks/education/strategies/05262000-6129.cfm”>Moving
Average Crossovers. I also recommend newcomers read my tutorial, href=”/.site/stocks/education/strategies/06272000-6815.cfm”>Trading
HOLDRs: Unique Opportunity And Risk.

Fed Optimism Lifts Financial ETFs

BUY THE FEAR, SELL THE GREED

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