March 11, 2008
The day was set to begin strong, but once the Fed announced that they would loan banks $200B and allow banks to use their existing mortgages as collateral, the market decided to make it a memorable day. Whoever was still short heading into today, was most certainly squeezed out of their positions, which caused an even greater rally than anyone anticipated.
There was four important items that were in play today: 1) The Fed announcing an additional $200B to be pumped into the struggling financial industry, allowing for banks and other mortgage companies to begin loaning out money once again, 2) Extreme oversold readings in the general markets, 3) A report stating that we are likely to avoid a recession, giving hope to investors, and 4) Massive short-covering across all sectors adding fuel to the rally. With all of this combined we had a ‘Perfect-Storm’ type of situation that sent stocks soaring.
Because the Fed announced that they are willing to infuse another $200B into the credit markets, we may have also received a signal that they are less likely to cut interest rates as aggressively as they have recently. With a weak dollar and soaring commodity prices, the Fed understands that to cut rates as aggressively as they have been, may do more harm than good in the long-run to the falling dollar and general inflationary pressures. As a result, they have devised an alternative plan that may be even more effective for curing the problems in the financial sector. That doesn’t mean they are done cutting rates, but we would not go into next week’s FOMC Meeting thinking that they are going to give the markets a 75-basis point cut.
Let’s review the charts…
NASDAQ performed very strong today, and may continue to see strength in the index as the bulls try to put together a series of rallies to show that the worst is behind us. However, to be a consummate bull in this market is foolish, and until we see some resistance levels shattered, we are going to be reluctant to go heavy on the long-side.
S&P performed equally well, but even so, we must be reminded that we are still trending downward, and we are going to need a string of consecutive rallies. A major milestone that needs to be reached is the breakthrough of the 50-day moving average and to close above it – something it hasn’t done since late December of last year.