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Completely Fed Up
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: February 1st, 2008 at 6:19 pm EST
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Tuesday, the Fed gave the markets what they wanted…indeed for the first time, as all other moves were widely unexpected. The initial response was expected: a strong surge…but it didn’t last too long. In fact, a 200+ point rally failed badly into a negative close. Not the type of action you expect to see in a bull market, now is it? In a week, the Fed has slashed the funds rate nearly 30% (from 4.25% to 3%), all in an effort to shore up confidence and spark some economic growth. But at this late stage, is it enough?
It looks like traders and investors may end the week with a stamp of approval for the Fed’s action this week. And while we cannot be sure if it was the rate cuts or the potential buyout of Yahoo by Microsoft, this may be the first Friday in 2008 that we close in the black.
Play the Waiting Game
I’ve postured in previous TrendWatches that the Fed has been somewhat complacent in their actions, preferring to ‘wait it out’. Why the delay is an interesting question. Perhaps the inflation issue is really bothersome, but that couldn’t be noticed in the recent aggressive rate cuts nor in the statement. Interestingly, Wednesday’s cuts were the first time the Fed gave the market what they ‘expected’. Bonds sold off afterward but money flowed right back into the longer term instruments Thursday. They are trying to find the bottom for the economy, and these rate cuts will eventually support it.
Market Performance
One mantra that has been consistent for years was coined by Marty Zweig: Don’t fight the Fed. Don’t step in the way of rate hikes, and don’t bail out during a rate cut cycle. But how has the market performed since the cuts started in September? Pretty lousy, actually. Markets are down near 7% in four and a half months. Maybe the slogan should be ‘don’t fight the fed when they are finished’. Market players have treated the rate cuts like a drug addict needs a fix. This, of course…will end soon enough…as the Fed will have to get the market off of its ‘crack addiction’ (rate cuts).
Regardless of how Friday ends it is probable that we will end the best week in 2008 today. Looking back on it, the market is on a continuation reversal path from last Tuesday’s market meltdown. As I said earlier, this maybe the first Friday in 2008 to end in the black, which is important to point out because it shows real underlying sentiment. Investors’ confidence can be measured on whether or not they leave capital on the table over the weekend.
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Bob Lang, Economics, Stock Market
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