The Fed Choked and Decided to Inflate the Problem
Kevin Haggerty is a
full-time professional trader who was head of trading for Fidelity Capital
Markets for seven years. Would you like Kevin to alert you of opportunities in
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The Fed cut the Fed Funds rate by 50 basis points to 4.75%, and cut the
discount rate a .50 point to 5.25%. The Fed Funds rate was effectively trading a
.25 point lower before the cut, and the Fed confirmed that, plus another .25 point.
This action is consistent with recent Fed history where the answer has always
been to inflate your way out of your problems (ala Greenspan). Prior to
yesterday, the Fed has been expanding the money supply (M3) at double-digit
rates, so now they have finally made an obvious move to acknowledge and help to
rectify what most have seen coming for some time, but the Fed failed to
acknowledge. The subprime credit and housing crash took precedence by the Fed
over the potential inflationary problems of a declining $US Dollar, rising crude
oil prices, gold and other commodity prices. On the rate cut, crude oil rose
above $82 in New York, while the $US Dollar index declined -0.6% to 79.22, which
is another new low, and will probably take out the 78.19 1992 low, which is
certainly not a positive for the equity or bond markets.
The spike in the major indexes was expected and explained in the previous
commentary “Rate
Cut, Option Expiration Plus Time Symmetry Equals Volatility This Week.” The
extent of the spike yesterday forced significant short covering and real buying
in the brokers, banks and retail sectors, but the biggest gains were in the
homebuilders, with the XHB +6.0% and SLX (steel ETF) +6.4%. There might have
also been some option expiration activity to help accelerate the move, not to
mention that there is significant key long-term time symmetry this week.
The primary trading focus before the rate cut other than the major indexes
and ETFs were the multinational, energy and commodity stocks, in addition to some
of the bigger technology stocks. After the rate cut, with the inflationary
implications that go with it, there was more reason to maintain this focus. The
members of the Trading Service got a bonus yesterday and were able to play the
Gap Pullback strategy in the major indexes, after the contra move by the gap up
opening. The spike in volume was big after the rate cut, as NYSE volume was just
685 million shares 5 minutes before the cut, and it finished at 1.65 billion
shares, with the volume ratio obviously all one-sided at 96 and breadth +2674.
The SPX went out at 1519.72 (+2.9%) with the $INDU +2.5% to 13739 and the QQQQ
+2.5% to 50.02. The biggest percentage move by the major indexes was the IWM at
+4.2%.
The SPX futures are +8 points as I complete this at 8:45 AM, and the SPX, $INDU
and IWM are already beyond the +2.0 Standard Deviation levels on the 20- or
30-day Standard Deviation channel charts, so if the futures hold and the indexes
open higher, it will set up the contra side for traders this morning. The rate
cut will stall, not prevent, further decline in the major indexes, as the
subprime, credit and housing depression are not going away overnight, and the
$US Dollar is on the cliff.
Check out Kevin’s strategies and more in the
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Trading With The Generals 2004 and the
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Kevin Haggerty