4.75%

By now, you know that the Fed raised its key short term lending rate by, yes, 25bps to 4.75%.  The markets kind of did what you would normally expect them to do under the situation.  I say, normally, due to the recent trend of the market not necessarily doing what makes sense.  After the announcement the stock market sold off, bonds sold off more, and the dollar was strong given the prospect of higher rates.  All is good with the world except that the markets response was fairly muted.  

We know that the market has tried to guess what the Fed was going to do with interest rates given whatever news bit came out, bullish if the news was bad and bearish if it was good.  This is not a normal reaction on the part of the market but the market logic seems to be fairly twisted these days.  So, Tuesday’s reaction seems almost contrived.  With the end of the month and quarter right around the corner, we expect the market to make up this lost ground.  

We still believe though that the rally is on borrowed time.  We read with interest an article about the “sell in May and go away” on CNN Money.  The article said that there should be a modest pullback as is normally the case in the second year of a Presidential term.  The article mentioned a pullback of about “12%”, in quotes because when you say about you should probably say about 10% or 15% not about 12%, it sounds too accurate.  While we agree with the general tone of the article and the direction the market will take this year, we disagree with the magnitude of the move.  We think more in terms of About 27.234%...seriously, we do think in terms of 25% for the year or more from these early year highs.  

The market did manage to take out some of the overbought nature on Tuesday as the Dow dropped nearly 100 points on its way back to 11,000 and below.  As more time goes on, we are feeling more and more confident that the high for the year is in place and it’s only a matter of time before the markets correct.  

The only other news on the day was the Conference Board’s Consumer Confidence Index and that showed a remarkable upward adjustment last month.  This report suggests that the consumer is feeling very good and complacency reigns.  These are good indicators to us that the market needs to adjust more than About 12% but we will see.

Be careful out there…

[Reminder: The Update will only be published randomly until April 8th.]  

Dow Industrials:  11,154.54  -95.57
RYVNX:   18.94
RYAIX:  22.19
TLT:  87.93
BEGBX:  12.92