December 11, 2007
It honestly should not have had to come to this point. A few weeks ago, no one was even expecting a cut by the Fed, and then when the Fed decides to give us a little hint as to what they intend to do, investors take an obvious .25 point cut and convince themselves that the Fed is going to cut by .50 point. Heck, there was people out there even mentioning back-to-back .50 point cuts or a .75 point cut. Just absurd! Nonetheless, the Fed acted appropriately, and in accordance with exactly what they were telegraphing to us all along. The market clearly didn’t like it and now you get a 300 point down day. If you read our analysis on Monday, you were ready for this. Today’s action didn’t surprise us one bit.
Over the past four years we have grown very use to a consistent Bull Market. However, there are such things as market cycles and eventually you are going to run into a top in a bull market. Whether this is it, remains to be seen. But frankly, expecting the Fed to bail out investors every time there is uncertainty and risk is ridiculous. Banks got themselves into this position and they need to weather the storms that each of them are facing. Expecting the government in any capacity to help you out is essentially asking for a “Get Out of Jail Free” card.
The reason why investors are so upset at the decision by the Fed is because, going forward there was no other events or stimuli that would allow for investors to make profits to the long side. The economy is hurting largely because of the financial institutions handling of subprime mortgages. In order to continue to prop up the stock market, investors were depending on the Fed to give them an outlandish cut in the rates and when they didn’t get it, they had nothing else in the near term to lift the market. That’s where you get a sell-off like today
With that said, we are in a market that, at this time of the year, historically performs well. Many portfolio managers will sell their holdings in losing positions and buy into those stocks that have had good returns on the year – this is done more so for window dressing for their clients to see, to convince them they are in all the right investments. Therefore, often times the market rallies because of this and the fact that Christmas sales are in full swing.
With everything that was just said, we believe that the pressure in the markets currently are to the downside with very little news between now and the end of the year to provide the market with any upward momentum. In six weeks when the Fed meets again, investors will again start concocting ideas of what they think should or shouldn’t happen.
You can read the FOMC Statement by Clicking Here
Let’s review the charts…
NASDAQ traded sideways for most of the day, and started to trend up ahead of the Fed decision, but once the Fed cut was announced chaos broke loose and the NASDAQ finished down about 2.5%.
The S&P also had a difficult day and gave back 2.5%, equaling the gains of the past four trading days. A possible rebound may be in order as often times the market will have its infamous dead-cat bounce.