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Tuesday, May 04, 2004
Market Recap
The market was on hold for most of the day awaiting the central banker's comments on interest rates. Both the Dow and NASDAQ drifted down slightly for most of the day until just after 2 pm when the decision was announced to leave rates unchanged. Then the buying flurry started and the market rallied straight up - for all of 30 minutes. That brief rally was sold off fast. There was some buying that came in late in the day to at least keep the market green at the close. The continued low volume on the rally from the 200 SMA line on the NASDAQ is a concern; to me it is a very bearish sign.
Basically, the fed today was a non-event. They had nothing new to say and everything they said had been said before, so the market already had this factored in. When people wonder why the market reacts the way it does, I will echo what I said last night. The market moves in advance of most news, and this fed decision was not a surprise. I think we all knew that rates would not go up today and so that was a known fact in the market.
Follow up on interest rates
Today proves that the market is irrational and unpredictable. The last time Greenspan spoke, he basically said the same thing he said today. That time, the markets sold off. This time there was a minor rally. His position has not changed at all, yet the market reacted in a different way on these separate occasions.
"Threats of deflation, which were a significant concern last year, by all indications are no longer an issue before us," Greenspan said in response to a lawmaker's question a few weeks back and the story was the same today.
Threats of deflation are diminishing and that is positive sentiment about the general economy and of things to come. Businesses should react well, knowing that we are no longer in fear of seeing any major deflation. Other positive statements about the lack of concern over deflation, the improvements in job growth, and very low inflationary pressure went over well. All in all, I would say his comments should be a very welcome sign that the economy is improving.
People are now ready for the central bank to raise interest rates. In fact, they are so ready for it that it is already priced into the market (or it will be priced in by the time we get the first rate hike). This is why I said in last night's Commentary that we could even get a rally in the market when they do finally raise the rate. We just do not know how the market will react, but I would like to share a theory with you tonight regarding how I feel the market will react when rates start rising.
My Theory About Next Rate Hike
When rates are raised, it should only be by a quarter of a point. This increase would still have rates near a 40 year low. The rate would move from 1% to 1.25%. This is still very low. If they raise another ΒΌ point a few months from the first rate hike, then we will be at 1.5% - still very low from a historical perspective.
Knowing this is still very low; the market could very well rally. As I have said before, markets normally decline when rates are raised, but think about this: (and here is my Theory) the last time Greenspan went on a rate raise binge, the bull market was in stage 5 (the blow off top). It was only natural for the market to decline because all stocks were over priced. It was the mother of all bubbles, and the NASDAQ was on stilts waiting to fall over. Rates were a lot higher than they are now before he started raising rates more and more. Coupled with the bubble prices in stocks, conditions were ripe for a big bear market, and it came in with a bang.
Our situation now is much different. Rates are very low when the rate hikes start this time, and the market is not over priced. This is why I think we will get a rally in the markets when the rates get raised. I could be out in left field on this one, but I believe it is a theory to at least consider.
I'll discuss sector trading tomorrow night, and that may develop into another series of Commentaries. As a little preview, I have some charts of various sectors of the market.
Short Term Portfolio
We are still sitting on a fair amount of cash and our long positions are hedged with shorts so we are in great shape. The smart money will be buying again soon; we are simply waiting for the right opportunities and for the charts to set up again.
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
- UGHO
- CXIN
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