1/27/08

As the Fed panicked in apparent response to the latest “rogue trader” problem, the 10-week and shorter cycles established the expected low on Tuesday morning. It had some of the characteristics of capitulation, so it may ultimately prove to be the major low that I have been expecting in the April time frame. However, a retest of Tuesday’s lows (Wednesdays on the Nasdaq) appears likely. If those lows hold, we can conclude that the bull market has resumed. If not, we will have to wait for more dramatic capitulation later.

It seems unlikely that the Fed would panic in response to a mere 20% decline in stock prices that was widely acknowledged to be long overdue. More likely it was concerned about the banking system, the economy, or both. Certainly the large reduction in short-term rates will help bank profitability significantly, and the sympathetic move in long-term rates will help the economy. Whether or not it is in time to prevent recession is a question that remains to be answered, and we can probably look to market action going forward to answer it.

A more detailed analysis will be provided in the PowerPoint briefing that I will post in a couple days.