Wednesday, September 20, 2006

The Fed Stands

Wednesday the market opened strongly on the back of ORCL as well as a few other good earnings reports, a big one from Morgan Stanley. After the initial blast, the market traded in a fairly narrow range, waiting for the Fed’s announcement in the afternoon. The news was just what the market was expecting, no change in the Fed funds rate. There was some chatter about how the Fed was potentially going to raise rates so a quick market drop of about 30 points occurred right after the news. After that, the market managed to crawl back to highs of the day on the close.

In our last post we mentioned that the 1325 level in the SP 500 was a critical spot and while the SP 500 moved a little higher than that during the day, it closed right at that level. Sometimes this technical stuff actually works. The May high close in the SP 500 was 1325.76 and Wednesday’s close was 1325.18, a full 58 cents less. The same thing is going on in the Dow, with that index putting in a closing high in May of 11,642.65 compared to Wednesday’s 11,613.19. (By the way, the NASDAQ Comp had a closing high in late April of 2370.88. Wednesday’s close of 2252.89 is a far cry from that level.) These differences are hardly worth talking about but the proximity is worth talking about. The bullishness out there right now is not getting much in terms of price action.

One of the indicators we watch is volume and volume is not confirming this move up either. The average daily volume at the NYSE in April and May was just about 1.7 billion shares. The average daily volume in the last two months has been about 1.5 billion shares. The volume on Wednesday was 1.6 billion shares, so only about 100 million shares more than the last two month’s average.

Some of our other momentum indicators are not showing any comparable strength to the May highs. The volatility index is again pushing down below the May lows (this is an indicator that goes opposite the price of the major stock indexes).

We remain bearish and are wondering if the May highs will hold this advance. By all counts, it seems they should.

Another reason cited for the advance on Wednesday was the drop in oil prices. We see this as a dangerous, slippery slope. All the time the market has been rallying the price of oil has gone up. Now that the price is dropping, we need to ask the question “Is this bullish?” Maybe on the very short term, we could see how the market participants could interpret it as bullish hence a day like Wednesday.

Dow Industrials: 11,613.19 +72.28
QQQQ: 40.43
RYVNX: 19.89
RYAIX: 23.15
RYCWX: 40.03
TLT: 88.43
BEGBX: 13.65

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