some questions answered
since the last post where the market's strength was questioned we've seen a 3% drop. normal range and on the surface not much to get excited about. but, much has been happening.
in "the big picture" on a1 of the investor's daily, yesterday's fed rate cut rumor was billed as the driver of yesterday's afternoon rally. the fed has at least one problem and its the economy - not so hot domestically. they can't let housing drag it down too much more so more rate cuts are coming. my reaction to this rumor/news is that the fed needs the stock market to replace the wealth lost in housing. that's the easy solution and one that they figure will probably work reasonably well.
however, the market signals are telling us something else. the volatility index is swinging sharply - in the last 5 days we've had 4 20% swings. that is fairly unusual and mimicks some of the trading from late july/early august. the level of subprime related writedowns are not really surprising but the recent ones from merrill and wachovia were grim reminders that there is a problem out there that has not completely gone away. a look at the money center banks (c, bac, jpm) is more depressing. these great drivers of monetary growth are not carrying their weight. c is at a new 4 year low, bac is at a new 18 month low, jpm is the champ of the group but it is underperfoming 55% of all other stocks so its hardly worth getting excited about. this is probably why the fed needs to steepen the yield curve further (thru rate cuts) so the banks can make more money and improve their weak levels of loan activity.
if the fed reinflates this mess then inflation worries will abound. so for every fed rumor that gets mentioned, the materials sector should rally. keep an eye on copper (pcu, fcx), gold (aem), and dry shippers (drys) to get a sense of how serious the inflation threat is. the dollar/euro relationship also bears watching.
at the same time, watch those winning stocks. we have a few parabolic names in the list and profit taking is tempting but it seems like the rally is a few good days from an explosive move. i think that move goes higher but anything can happen in this edgy environment. stay tuned.
in "the big picture" on a1 of the investor's daily, yesterday's fed rate cut rumor was billed as the driver of yesterday's afternoon rally. the fed has at least one problem and its the economy - not so hot domestically. they can't let housing drag it down too much more so more rate cuts are coming. my reaction to this rumor/news is that the fed needs the stock market to replace the wealth lost in housing. that's the easy solution and one that they figure will probably work reasonably well.
however, the market signals are telling us something else. the volatility index is swinging sharply - in the last 5 days we've had 4 20% swings. that is fairly unusual and mimicks some of the trading from late july/early august. the level of subprime related writedowns are not really surprising but the recent ones from merrill and wachovia were grim reminders that there is a problem out there that has not completely gone away. a look at the money center banks (c, bac, jpm) is more depressing. these great drivers of monetary growth are not carrying their weight. c is at a new 4 year low, bac is at a new 18 month low, jpm is the champ of the group but it is underperfoming 55% of all other stocks so its hardly worth getting excited about. this is probably why the fed needs to steepen the yield curve further (thru rate cuts) so the banks can make more money and improve their weak levels of loan activity.
if the fed reinflates this mess then inflation worries will abound. so for every fed rumor that gets mentioned, the materials sector should rally. keep an eye on copper (pcu, fcx), gold (aem), and dry shippers (drys) to get a sense of how serious the inflation threat is. the dollar/euro relationship also bears watching.
at the same time, watch those winning stocks. we have a few parabolic names in the list and profit taking is tempting but it seems like the rally is a few good days from an explosive move. i think that move goes higher but anything can happen in this edgy environment. stay tuned.
posted by David Geller at 11:39 AM
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