Wednesday, October 04, 2006

The "Fed Will Ease" Rally

We’re not sure what to say this evening as the market has just busted loose to the upside, so to speak.  Prices jumped on Wednesday, as the combination of economic weakness and the hope for the Fed to start lowering rates brought buyers into the market.  We’re not really sure but the “Fed is done” rally seems to have given way to the “Fed will ease” rally.  Neither one brings us any understanding as to why the market continues this vertical run.  

We here at what seems like bear central have been getting punched in the stomach enough to feel it in the wallet.  This three month rally seems to be like the Energizer Bunny, it just keeps going and going.  Our speculation is that the market truly believes the Fed is now going to let things go.  With Fed Chairman Bernanke making comments about the housing slowdown causing the GDP to be 1% smaller than it otherwise would be, the market took that as a sign that the Fed was going to ease sometime early next year.

The ISM services index dropped to 52.9 well under the consensus of 56 and last month’s 57.  This news is taken as good since it now will lead to a Fed easing.  So, we see now that any news, good or bad, is bullish for the market.  Oil is up or oil is down, either is bullish.  Interest rates on the rise for over two years is bullish because at some point the Fed will have to stop and when it does stop, the future moves must be to start dropping rates so that’s bullish too.  All twisted logic to us.

The precious metals complex made an effort at a low on Wednesday.  Gold dropped about $15 at one point but after the normal trading hours for gold were over, it managed a nice rally which brought the HUI back from an 8 point drop under 275 to being up almost 3 on the day at 285.  We are going to watch this area for a possible bottom.  We expect a retest of these lows at least before a serious rally starts—but we have been wrong before.

Dow Industrials:  11,850.61  +123.27
VIX: 11.38
QQQQ:  41.30
RYVNX:   19.09
RYAIX:  22.71
RYCWX:  38.58
TLT:  89.83
BEGBX:  13.73

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