For a second straight day, the Fed's plan to allow banks and bond dealers to swap mortgage-backed securities that they can't currently sell for highly liquid Treasurys affected financial markets. After the move was announced Tuesday, the Dow posted a gain of nearly 417 points, its biggest single-day jump in more than five years.
After such a large move, stocks typically enjoy a mix of follow-through buying, turnaround selling by investors looking to book a quick profit and, in general, a round of reflection among participants trying to figure out how the long-term underpinnings of the market have shifted.
The last paragraph is an excellent summation of where the market is right now. The Fed changed the underlying rules of the game; they said they would once again add a ton of liquidity to the financial system in an attempt to unlock the credit markets. Before that announcement all of the averages were headed lower. Now traders are wondering, "will this latest move really do anything meaningful to change the underlying situation or not?"
Remember the Fed has been acting aggressively for some time. This is not the first liquidity injection. In addition, they have been cutting rates. But the economic news has continued to worsen. While it takes up to 18 months for interest rates cuts to work their way through the economy (meaning the total impact of the first cuts won't be completely felt until the fourth quarter) traders are an impatient lot; they want their good news now.
Let's see where the daily charts stand after the Feds announcement
Yesterday, the SPYs bounced off the 10 day moving average and also fell below the price level established in early February. But the volume wasn't extremely heavy, indicating this was not a panic sell-off.
On the QQQQs, notice that:
-- Prices are between the 10 and 20 day SMAs, having had a nice one day bounce. But
-- All the SMAs are moving lower
-- The shorter SMAs are below the longer SMAs
On the IWMs, notice that:
-- Prices are below the 10 day SMA, bouncing off this level yeaterday
-- All the SMAs are moving lower
-- The shorter SMAs are below the longer SMAs
