Why I Think You Could See Quite A Rally

The major indexes rebounded from the previous week's sharp declines with a pretty impressive performance.  Market pundits cited robust earnings data for the gains, but more than likely it was further anticipation that the Fed was nearing completion with regard to further rate hikes, especially with the current trouble-maker heading out the door.  Early in the week, equities largely traded sideways with a minor upside bias.  However, this changed on Thursday and Friday when the key averages posted solid gains.  The advance was strong enough to allow both the Russell 2000 and Dow Jones Transportation Index to record new all-time highs.  Technology and Transportation shares out-performed, while weakness was seen in energy names.

Coming into the year, the focus was on sectors such as Internet, Precious Metal and energy names from the long side.  The focus on the short side consisted of interest rate sensitive shares such as Homebuilders.  However, with Friday's extremely soft GDP data increasing the chances of the Fed becoming more dovish, it may be time to change that focus again.  This is because if the Fed goes on hold, interest rate sensitive shares could see quite a rally.  Even though the Housing sector could very well be entering a secular downtrend, it probably won't matter in the near-term if the Fed were to indicate that they are done raising rates for this cycle.

The Fed stopping would likely add weight to the "soft landing" scenario, which incidentally, would be very similar to 1995 when stocks started to rally higher off similar bullish economic news.  While I believe a comparison to 1995 could prove overly optimistic, as usual, it's probably best to wait until after the Fed Meeting before making any major bets in either direction.  Tuesday also marks the end of an era as current Fed Chief Greenspan officially retires.  Those of you who’ve read my columns for the past few years know my thoughts that a Fed Chief has no business sticking his nose in the equities markets as much as Greenspan did.  Nor, in the history of the equity markets, have we seen market participants so closely “hinged” to every word that spewed from that man’s mouth, despite his performance record.  So, on that note, all I have to say is “Alan, don’t let the door hit you in the a** on your way out.”

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

chris@tradewindsonline.net