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Monday, June 28, 2004
Good evening friends,
Market Recap
Iraq was turned over to its new government today, two days earlier than expected, and the market answered with approval in the form of a morning rally. This rally soon fizzled in the afternoon as the sellers came in when news of violence on the Gaza strip hit the wires along with more news of militants threatening further executions. The Dow closed down -14 points after being up over +80 in the morning, and the NASDAQ closed down -5 points.
Interesting Week Ahead
We have a very interesting week ahead, and I believe the start of a nice rally in the markets. Uncertainty about interest rates should be answered this Wednesday. Wednesday is also the end of month and end of quarter for mutual funds. This may bring some volatility in trading that comes so often when end of month/ quarter widow dressing occurs.
The Fed will meet Tuesday and Wednesday, and they will release its decision on interest rates Wednesday. As I have stated before, there is a strong likelihood that they will raise rates this time. The big question is just how much the Fed will raise interest rates. We have known for quite some time that a rate hike was inevitable, and it has likely been factored into the market already. What has not been factored in is the size of the increase.
Will it be ¼ percent or ½ percent? I believe a 1/4 percent rate hike is already factored into the market. A ½ percent rate hike has not been, and if the Fed surprises us with a whole ½ point raise, it is hard to say how the market will react. The initial reaction will probably be to sell, but I believe a rally will ensue shortly after the initial reaction. At this point, it is crazy to try and predict what the market will do.
My advice is not to trade in the first ten minutes after the news comes out. This will be like the open of each day; once the bell rings it is a mad house. Same thing with the Fed decision, it will be crazy in the first few minutes after the release if it is a ½ percent raise. However, if we see the expected 1/4 point hike, I think there will be very little reaction from the market.
Longer term, I think the markets will rally in either case. I say this because rates have been at historical lows for a while, and they will still be near a 40 year low, even if we see a 1/2 percent rise. How will the market take this sudden hike? Does it rally because it knows rate hikes are over for awhile? Does it sell off because it thinks the Fed is acting out of panic by such a large raise? I do not know the answer but we will soon find out, and after the dust settles, we will see where the market is headed.
Projected Future Rate Hikes
We will need to listen to the projected future increases the fed may take in the comments accompanying the decision. This is what will have the greatest impact on the markets. Will he be Mr. Greenspook or Mr. Greenspark this time? When he speaks, the market reacts. I suspect that we will see future rate increases on a somewhat measured basis. The Fed will let the economy expand and raise rates slowly to simply keep the growth in check. Mr. Greenspoon will spoon feed the market with his comments which are likely to be overly cautious (as he is always is with his remarks) and may not say much to spook or spark the markets.
Although he has recently accepted the nomination to a new term and there is a chance that he may be more open with his words, I seriously doubt it. He needs to keep the thought of rising interest rates on everyone's minds, but he also needs to temper that by stating that the economy is growing at a very nice pace. The GDP numbers are strong, but have been slowing down some recently. Inflation seems to be in check but has ticked up ever so slightly. In any case, most of the effects of any increase will not have any real financial impact in the economy until months down the road.
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OTC BB Watch List
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