Top Line: The market decided to do an arch today, up in the morning and down in the afternoon. This is the look of a turnaround in prices that may last a couple of days. This may be related to the timing of the FOMC meeting going on Tuesday and Wednesday. We'll review again in the next few days.
As for the FOMC meeting, how can this be anything but trivial to the market? What are they going to say, "Oh, yeah, we can't lower rates anymore or we would." Bernanke was on "60 Minutes" on Sunday evening and suggested that the economy would be coming out of the recession this year and that 2010 would be a recovery year. Bernanke did put a caveat into his speech that the government must make sure that the financial sector finds its footing. He does not want the government to lose its resolve in this effort. Here is a similar article from the WSJ.
To continue with Bernanke, he said that they are "printing money" so that it doesn't cost the taxpayers so much...What? He said once the economy turns around, this extra money will need to be extracted so that the economy doesn't produce a lot of inflation. This fits pretty well with our short term rally in the stock market followed by a dreadful downturn. When will the Chairman figure that it's a good time to pull out these excess funds? We think that the market will go up (a lot) this year and that will be enough to encourage them to start withdrawing. This will help the market go back down and then they will try yet again to restart the economy with these extra funds again...and so it goes.
The market will try to see how far the correction can go. This downturn could give us good clues for the next big move. We do think that that it's possible that the downturn is going to be shallow and brings the buyers back sooner than later. It's possible that some of the major indexes find a way to drop to new lows which would be a nice non-confirmation with a strong rally to follow. If all indexes manage to make new lows, we'll have to consider a slightly lower low but we don't think this should happen...
However, the recent news out of Washington is getting scary. The politicians are going after blood at AIG and that is a good way to bring fear back into the market for one last drop. We seem to have a voice of reason in Bernanke (kind of surprising really but when all around him are seemingly not smelling the coffee, he does seem to sound reasonable) against the wierd leadership from the government. We are treading on dangerous ground here. This is not a time to put fear into the people. We need confidence.