The Fed cut both the Fed Funds rate by 50 basis points, as well as the Discount Rate, also by 50 basis points. It was expected that they would possibly cut both by a quarter, or just the Fed Funds by 50, but most pundits didn’t think they would do both. When they did it caused quite a fast and sudden rally at the instant this was announced. I usually stick with the technicals on this blog, but I do try to understand the fundamentals. Let me see if I understand what just happened. The Fed, under Greenspan, lowered interest rates and kept them absurdly low for a long time. This was apparently to shut off the prospect of deflation and to encourage borrowing. This caused hardship for those retirees on a fixed income as CD rates plunged close to one per cent, but it encouraged a steep rise in housing prices so many people could tap their equity to buy new flat panel TV sets and put down payments on new cars. Rising housing prices encouraged wild speculation in Miami condos and elsewhere, as well as for lenders to come up with creative ways to finance mortgages on this speculation, with no money down, no documentation for the loans, no credit history, no principal being paid with the monthly payment, in some cases not even all the interest being paid with the monthly payment, etc. The low interest rates caused the dollar to fall out of bed, and that further fueled the rise in commodity prices. So the Fed became concerned with rising housing prices and rising commodity prices. I guess they weren’t too worried about the falling dollar, but it seems that the falling dollar was part of the problem with all the rising prices, but what do I know. Then, the worried Fed decided to raise interest rates to cut off the rising prices, but when the prices stopped rising in the housing market, with the resulting slow down in spending, and then the sub-prime people couldn’t continue making their payments on their declining assets, the whole game started to unravel. Wasn’t this inevitable? So to bail out the mess they created, the Fed is now lowing interest rates. Am I missing anything here? If this were a comedy presented as a play set in a different time, it would be quite funny. But this is happening now. So it’s party time again. Low interest rates. Skyrocketing gold and stocks. The Fed will be there to bail out speculators. They will take away the pin whenever the bubble gets too close.
At any rate, the momentum indicator on the Qs is still positive. It turned up five days ago, and with today’s move it painted a second green dot. It didn’t go under its signal line. The open today was over the three-day pivot (I finally posted an article on that), and after the Fed announcement, prices exented upward. The other stock indexes had similar gains, but I’ve only been focusing on the Qs for long trades. The small caps had the largest percentage gain today of the broad US indexes.
The gold market extending its recent uptrend. The three-day pivot held the rally nicely. Momentum had turned down several days ago. I indicated that the downturn in momentum was not a sell signal, but a possible pause and suggested new longs at these high levels were very riskly. I still believe that. Had the Fed cut any less, the gold market could have gone down today much more than it went up. However, momentum is back to the up side according to my very short term indicator. I still think this market is too extended and vulnerable to a shake out. The dollar fell, as would be expected, on the Fed announcement. It is deeply oversold, but most analysts think it will forever fall and they think that is good.