Markets Like Bernanke’s Kind Words

January 10, 2008

Holding its own for most of the day, after rallying strong in the previous session, markets welcomed the words of Ben Bernanke, as he assured everyone that more rate cuts were to come. The question at this point isn’t “if he’ll cut rates” but by “how much” he will cut rates. A quarter-point cut is a given, however, there is much speculation in whether he will cut rates by a half-point or more. More than a half-point seems far fetch, as it would seem more logical that the Fed will want to at least test the waters first by cutting rates by a half-point. But because of the devaluation in the dollar, the Fed still may be hard-pressed to cut by more than a quarter-point. If such is the case, investors and traders alike will be left very disgruntled by the decision and would likely spur on another sell-off such as the one seen following the last FOMC statement. Currently we believe that the likelihood is 50/50 of a half-point cut versus a quarter-point cut. Further speeches in the weeks ahead by Fed members should reveal more into the likely outcome of the January 30^th meeting.

It should also be kept in mind that the market is looking less and less to the Fed to bail them out of the trouble we are currently experiencing and instead more willing to accept the reality of a possible full-blown recession. Should the Fed cut by 50 basis points we are likely to see a strong rally following the announcement, but if the earnings season disappoints, any kind of rally off of news from the Fed will likely be unable to hold.

Let’s review the charts…

The NASDAQ lagged in comparison to the other major indexes, but to no surprise, as this has been the trend as of late. The bears, despite the action of the past two sessions, seem to have a strong grip on this index, and doesn’t seem ready for it to rally past resistance at the November lows. We would view this area as a solid opportunity to further short this market.

The S&P had a better showing today, after dipping in and out of positive territory for most of the afternoon. The bright spot for the S&P was that it was able to break through the November resistance levels but, we remain skeptical as to whether it can hold these levels as it is barely hanging on at the current level.