Rally Undermined

By Dr. Duru written for One-Twenty

December 11, 2007

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Rally undermined...for now.

The Fed did the one thing I did not even contemplate with my last missive proudly announcing that the end-of-year rally was finaly underway. Not only did the Fed indicate that economic growth is slowing, but it STILL added that inflation risks remain! And for the triple whammy, the Fed added "recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation." Wow. Not only do we need to fear stagflation, but now the Fed is hinting it may be just as confused as the rest of us. I have done little criticizing of the Fed since Greenspan relinquished his throne, but this statement ranks right up there amongst the more poorly developed statements I have seen over the past several years. The Fed extended the harsh discipline from the last statement when it seemed to indicate it was done giving the market its rate cut drug - the harsh message this time is that things could be even worse than we think...or know. Yikes.

So, now my neat thesis on the reasons for being bullish have been cleaned out like so much chimney ash on the day after Christmas. The low-volume buying leading into today turned into high-volume selling with a quickness. The main good thing bulls can take from today is that the Fed's slow growth thesis means they have to keep more rate cuts under consideration. You can also read between the lines on the sell-off as opening up buying opportunities that swept by during the recent sharp rally from the November lows. The market now needs a new catalyst to believe in some underlying strength in the economy. The Fed provided hope a few weeks ago, and, easy-come, easy-go, it took the punch bowl away. If that catalyst arrives by the end of the year, and at this point, I sure do not expect it, we could see an impressive "Fed fade" that finally takes us to the next new 52-week highs I have been looking for on the short-term basis. The current risk is that we may now need to test (successfully) the November lows before we get there.

In the meantime, be careful out there!

Oh, and one sidenote. In the last missive I noted the strange divergence between the recent performance of Intel and Cisco. At the time I claimed Cisco might be the "sneaky" buy to play a tech rally going forward. Well, today, of all days, the performance divergence reversed. INTC got dropped for a 3% loss on the day, while CSCO managed to cling to a small gain of 1.3%. Even though that gain was even larger at the high of the day, and the intra-day rally got stopped cold at the important resistance of the 200-day moving average, it still makes me wonder whether fortunes are somehow reversing between these two tech bellweathers....

DR. DURU®, 2007