RSS feedA better week for stocks though next week will mark some real testing for the market with the September 18 Fed meeting and CPI and PPI numbers coming. The earnings season is beginning to pick up and there will be some headliners particularly in brokerages next week as well. One can draw some confidence from the fact that a high profile warning from Merrill Lynch as well as the news that the First Data buyout is having trouble raising funds did not hurt the overall market as much as one would have thought. During the highest volatility periods of the recent correction, the market might have lost 2% in a week with such news especially with oil prices sky rocketing to break $80/barrel for the first time in history and continued confusion over what exactly the Fed will do in a week.
No, last week did not mark the return of the bull run. Yes, the markets moved positively in the face of bad news, but only slightly. As mentioned this is a good sign, but with further economic data looming one has to wonder whether or not the market has picked up enough momentum to shake off an unexpected report next week. Most worrisome is the fact that 30-day Fed Fund Futures continue to sit at 4.86% for October 2007. One could gather from this that the market believes with near certainty that a rate cut is coming and that there is a 78% chance of a 50 basis point cut. I don’t share this view as I believe Ben Bernanke is a bit shrewder than this and I also believe he has not seen the requisite bombshell to get him to act.
Would I like a cut? I think it would be psychologically helpful for the markets in the short term, but it could be a bit short sighted. There may be a creative solution in all this. The Fed has already shown its imagination by providing a cut at the discount window rather than with the Fed Funds rate earlier and maybe they will have another trick up their sleeves. Another cut to the discount rate? Or, possibly, a cut to the Fed Funds rate with an increase of the discount rate both capitulating to the markets need for easier access to money but also making it clear that the Fed has no intention of continuing to support markets should that not be enough. Just some cute ideas off the top of my head. Part of me feels that it may just be time to take our lumps and let the economy work through this whole repricing by itself. If the Fed does make a move next week, I expect it to be the last for a while at least with respects to the credit crunch. One needs to give at least some time to see new data. The numbers coming out right now only reflect performance a month or a quarter in our history and we need numbers which let us know how the economy has been fared today or over the last few weeks.
Taking a look at technicals, the S&P has shown some strength in recent weeks. MACD and RSI which signaled turnarounds in late august have continued to trend upwards finally breaking the 0 and 50 marks respectively. Since the hammer produced in late August in the price charts, we’ve seen increasing bottoms in the chart as the market has begun its testing period. Volume also remains tame and back in line with historical averages. Even better, the NASDAQ and DJIA are showing nearly identical charts at the moment with the NASDAQ leading the recovery (just as it should).
If all goes right, next week could hold just the catalyst for another rally. Cross your fingers.
