I think this observation makes the most sense in explaining today's rally:
"There does come a point and time when the market itself recognizes that it got out of hand, and that is when bargain-hunters can come in," said Peter Cardillo, chief market economist at Avalon Partners.
.....
"You might say this is a belated reaction to what the Fed did this week, compounded by hopes for the Fed to do more next week," Cardillo said. Traders who bet on the Fed's target fed funds rate were pricing in on Wednesday a 100 percent chance of a 0.50 percentage-point cut by the central bank when it meets next week.
Briefing.com also noted that program trading probably had something to do with the rally:
The market has found a new rally gear in the past half hour, greased by program trading activity that has carried the Dow more than 200 points higher in the last 30 minutes. The S&P and Nasdaq have followed suit, and now, all three major indices are on positive ground after being down sharply earlier in the day.
Below are the chart that show the rally in a 5-day context. Note the extremely heavy volume at the end of the day and the fact that all the indexes closed at or near session highs.
Now -- let's speculate about the upcoming week or so of trading.
Yesterday the Fed lowered by 75 basis points. A 50 basis point cut is widely expected at the next Fed meeting. Let's place these moves in a broader market context.
All three averages are clearly in a down, up, down pattern with lower lows and lower highs.
Let's assume that we are now is a reversal of the latest downward sloping leg, which makes sense in the face of aggressive Fed action. Here are the Fibonacci levels for a possible rebound level for each of the indexes:
I want to add, I still think we're in a bear market. The financial sector is still a wreck; Christmas sales were weak and housing is still a mess. None of these problems is going to go away overnight. That means when the thrill of rate cuts is over, traders will once again be confronted with an economic picture that is poor.
5 comments:
I saw the Fed cut as a band aid solution, another Bush PR move, if you will. It will take a strong economic program to make the market sound, again.
How long, in your estimation, will it take for reality to set in, with Wall Street?
This Fed cut struck me as a junkie getting his fix, and he's happy, until he needs another fix.
I am surprised that you are not including the meetings on bailing out the mortgage insurers as an explanation for the surge in the markets. Bloomberg and others put that as the primary explanation.
Dantheman
Exactly - the market sparked on the news of a potential bailout for the monolines. Personally, I thought the details were pretty slim -- and we know how the super-SIV turned out.
If it turns out they were just blowing smoke about a bailout, this market will head south immediately.
And where are they going to get the money for a bailout? From what I've read, there are between 500 billion and and one trillion in unfunded liabilities.
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As much as the Fed wants to avert a Japan-like situation, its fairly plain to see the only way is down for interest rates until we hit the bottom - 0, or near 0 interest rates. That wont be enough, as was pointed out, its like a junkie getting their fix, and once the excitement of the interest rate slashing comes to an end, we are still left with the underlying issues that caused the problems in the first place. Warm up the helicopters!
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