Big Ben Brings A Bouquet of Bounty to the Doorstep

By Dr. Duru written for One-Twenty

March 22, 2007


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Ah, bears. It is still not yet your time. "Big Ben" Bernanke and the rest of the Fed "neglect" to remind the markets that they are more worried about inflation than a slowdown in growth. The market interpreted this latest deliverance as a signal that those long-awaited rate cuts are finally imminent and that was all we needed for lift-off. The day's moves were truly impressive (TraderMike gives the standard thorough breakdown of the action including likely resistance levels.) While I suggested earlier that the market's recent sell-off was marking a top, I noted in the last missive that another pop in the VIX could presage higher stock prices if past patterns during the past several years held up. As luck would have it, the market sold off that very day, and the VIX popped for two days only to usher in higher prices (on the S&P 500) for 5 of the last 6 days. Classic stuff my folks, and the bears have been squeezed again.

Wednesday's ebullience posts a nice counter-balance to the negativity that has been weighing the market down. If the well-worn sub-prime story was giving market players excuses to sell, the Fed gave a hint and a wink that the buyers can exercise excuses not to despair: the Fed will not allow the sub-prime mess to spread. Or at least they will try their best to be savior by subtly feeding those persistent rate cut hopes. A bouquet of bountiful get-well wishes are waiting at the doorstep. That mortgage remains buffered with low interest rates. The homebuilder ETF has popped above the 200-day moving average yet again and sub-prime and Alt-A mortgage companies soared again from the depths of despair. (By the way, did you happen to catch Hovnanian's CEO state on "Fast Money" on CNBC that the housing industry is in recession?!) Speculation and leveraged buy-outs still have the all-clear. I will repeat that I simply cannot understand the premise for a rate cut when the economy is doing fine overall, unemlpoyment is low, inflation rates are at or slightly above the Fed's comfort levels, and now savings rates are negative. But if we do further accelerate the currency printing presses, I love commodity-related stocks all the more. I am also realizing that the financials are another good play - I guess if there is more money sloshing around, the banks and brokers have more work to do trying to extract as much of this currency for themselves. Morgan Stanley (MS) reported earnings and was launched out of its W-double-bottom. The likes of Goldman Sachs are looking good again, and the rest of its borkerage bretheren may not be too far behind (check out the bounces in BSC, MER, and LEH for great examples). (See disclaimer here.)

In past missives I have reacted coldly to reactionary market rallies post-Fed. This time would be no different except it follows a period of such pervasive negativity. I have to respect this move even as I remain skeptical that the market can reconquer the recent 52-week highs. Let's not forget that the Chinese stock market has now recovered the losses of the vicious sell-off that was often blamed for greasing the skids on our own market. If past history is a guide, we will return most if not all of Wednesday's post-Fed gains within a week or so, but we are approaching the end of the quarter. The typical urge to buy may be more intense than usual. This could nullify the post-Fed fade action as folks who got out earlier this month rush to get back in...or risk getting left behind.

Be careful out there!

DR. DURU®, 2007