Rally May Be Over

Top Line: On Wednesday the Fed ended its FOMC meeting with a 50 bps cut in the fed funds rate which the stock market was hoping to get. What the stock market wants, Ben gives. That got a blip on the screen but the market closed down on the day anyway. We may have seen the peak of this corrective up move on Wednesday afternoon.

There had been some doubt that the Fed would deliver. We were fairly confident about the 50 bps cut over the past few days. Anyway, the stock market had been down a little, the Dow was down about 30 points going into the announcement, but after the news took very little time to get up 200 points. That move put the Dow up to around 12,680 still 70 points below the 12,750 resistance point we have been mentioning.

At about that time, with an hour or so to trade, the market started leaking almost like someone had pulled the plug out of the bathtub. The market was up 200 points but fell to close down 37 points on the day the Fed lowered rates 50 bps.

We need to add that there was plenty of news on this day and one headline did say that "U.S. Stocks Decline as Bond-Insurer Concern Outweighs Rate Cut". MBIA and Ambac have been mentioned in these pages recently but there had been some thought that the banks had so much at stake that they would rescue these bond insurers. This whole argument is pretty circular...the bond insurer is covering the losses of the bank and the bank says it will cover the losses of the bond insurer. Pretty soon you get back to where you started???

Then there was the UBS announcement of a $11.4 billion loss after a $14 billion writedown in its subprime portfolio. That loss is a big one and it comes from the Biggest European bank by assets (we wonder if that is before or after the big writedown). In fact, Bloomberg says it is the biggest loss for a bank ever.

There were two more items after the close that didn't inspire the bulls. One was AMZN's earnings and their call. The earnings were up quite a bit but their margins were down, which came as a surprise to investors, funny. Let's see, they reported a good quarter a while back because they were offering a deal for free or reduced shipping rates with an upfront fee and they took the earnings right away. Now, they are shipping for free and margins are down, yes, it sounds plausible. The stock was down over 10% after the news dragging the market down with it helped by news from S&P...

They said that they might downgrade $534 billion worth of mortgage debt. This news just added insult to injury after all of the bad news of subprime sort of hung in the air following the closing bell.

The other item we wanted to mention was in reference to SBUX (Starbucks) that we saw. SBUX had been mentioned here as a company to watch along with McDonald's when measuring the consumers ability to spend. Well, today the news was that they had decided to reduce the number of new stores this year by 350.

From an hour prior to the close until now as we write, the market has fallen. It is possible that the move we saw on Wednesday afternoon is the final push to correct the recent slide. We won't know for sure until we see trading over the next few days. The way the market fell away from the late afternoon highs which occurred in conjunction with a 50 bps Fed rate cut is indicative that the market may just be ready to show us how much a bear can growl.

The market could face a non-linear move, as they say, which means a sharp selloff. (They would never call a big up move non-linear, because that is what is supposed to happen.) We would have more confidence in that call if it wasn't so close to the end of the month and the jobs' report due on Friday. We will have more to say on this matter over the next couple of posts. We wonder what the Fed is thinking as the market has basically trashed both rate cuts. Their ammo is being depleted quickly, especially at the rate of 1.25% every eight days or so.

FSI: 82.39