April 30th, 2008

Reaction to Today’s Fed Rate Cut

I’m not quite sure by looking at a chart of today’s S&P 500 Index what the market had on it’s collective mind because right after the announcement, after a bit of waffling, the market swooned and dropped 1.4% before regaining its footing:

Apparently, the expectation was that the Fed would hold the line without a rate cut and was surprised by a small 0.25% cut (the expectation couldn’t have been for a half-point rate cut, could it?).

It’s interesting but the even more important fact is whether “the first monthly increase in the S&P since last year” signals the beginning of new upside momentum. And for an answer to that question I refer you to what I wrote almost a week ago (April 24). I said:

“…the gap between the 180-day and 300-day is a mere 1.4% [now 3.0% away due to declines in average since] so if this burst continues sufficiently to allow the Index to cross above the 180-day moving average then there’s a good chance that momentum will be sufficient to truly launch a new bull market phase.

I’ll let all the other talking heads and bloggers give you the explanations of why all this is going to happen. It’s the fact that the Fed will pause and hold rates at this level (that’s the first time I can remember a rate halt as being bullish!) which will stabilize the $US, help deflate the commodities and oil bubble, etc., etc. I’m going to rely more on the above facts and less on the subjective story.”

Again, what will convert this from a suckers’ rally into the beginning of a new bull phase is if the S&P 500 Index can cross over the 180-day moving average. Until then, you should consider new commitments risky. I’ve started to nibble at some of the new highs and industry group leaders (mentioned in previous postings) but still have more than a 50% cash position.

The market doesn’t feel all that firm and I may regret violating my discipline (the MTI has been stuck in an “all-cash” position since December 27 and won’t be out until the cross back up over the 180-day). But I’m an optimist (which could be very disastrous in a bear market) and can’t help it. That’s what a discipline and a plan should keep in check.

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