The stock market had no trouble blasting off on Wednesday morning. Sometimes the technical position doesn't need too much in the way of fundamentals to trade. But, when the market moves the way it did today, someone has to come up with a "reason" for the move. Today's reason was that the Fed Vice Chairman Donald Kohn said that credit conditions had worsened and that the Fed could step in to help. Let's see, what does that mean??? Fleck's title tonight was "Bulls party at Kohny Island".
With Kohn's remarks, the Fed Funds futures are pricing in a 100% chance of a 25bps drop at the December 11th FOMC. Based on the way these guys operate, they will lower the rates 25bps at that meeting but facts don't get in the way on days like Wednesday, just the hint of a little possibility. The reason for the rate cut is not bullish but the market thinks the rate cut itself is bullish because it can fix anything, including the common cold, we hear. How does a little rate cut help a housing market that is tipping over?
With the Fed behind them, traders were in a stampede to buy stocks from one bell to the other. We got the feeling that the buying was pretty much across the board as the recent losers, like banks, brokers, housing, and the Transports, went on a tear on Wednesday. The move was particularly strong with volume up and up volume swamping down volume. This was the strongest day we have seen in a very long time.
Strong days like this have to be looked at in context. As mentioned some of the weaker stocks performed pretty well on Wednesday which leads some of us to believe that there was a lot of short covering going on putting the squeeze on the shorts even more. Short covering, if that's what it was, is not bullish by itself because once that buyer is gone, stock ownership hasn't changed. The reason for advancing prices is more about forcing shorts to buy and that alone pushes up prices. There aren't new buyers in there taking new positions which they will hold for a long time.
We think the move is the start of a general up move that will alleviate the oversold condition we have been in for a few weeks now. Looking at the calendar, we see that the advance has come right on schedule, just around the end of the month. Here is a good opportunity for us to sit back and wait for a very good opportunity to use whatever loose change we have left to position for a very steep drop.
This move shouldn't last too long and it shouldn't go too high. We will focus on the Dow over the next few weeks to see what it will do. The past month has been a strong down move consistent with the start of something very important. This up move relieving some of the oversold condition should lead to a drop that will take out the August lows and leave no doubt in anyone's mind what direction we are going. The first dig was from about Dow 14,200 down to Dow 12,800, or about 1400 points. So, when we move back up to about 13,750 we should drop at least another 1400 points down to 12,350. These points will be refined as we move forward over the next couple of weeks.
We want to focus on what the market is doing, not what the media is saying. Whoever is quoted in the media is only one voice, the market is the collective voice and we should pay attention to that. Right now we think the market is telling us that the market has turned down at the intermediate time frame and maybe the long term time frame. If that is correct, this little rally phase will whimp out long before we get back to 14,000. Stay tuned...
We'll save the SIV talk for another day.
FSI: 105.28 (up 3.28%, yes, that's good but the Transports were up 3.55%)