Monday, February 4, 2008

Do Not Wager Against The Fed

It is an old saw on Wall Street that shorting stocks while the Federal Reserve lowers interest rates is likely to cost you money. Don't bet against the Fed. And historically, the axiom proves true. You can play with the statistics, starting and stopping the trade when you want, extending or shortening the time period, but by an obvious margin--a clear majority of the time--stocks push higher when rates come down.

So this chart ...what do you think? Is this recent rally a Dead Cat Bounce, the result of traders who believe in this axiom, grasping at straws before the next big leg down? I can see that in this chart, can't you? There have been several of these bounce-backs on the way toward the abyss. Or, has the market bottomed? Have the Fed's actions prevented a recession and a housing disaster? Sent a shock wave of stimulus to nip our economic problems before they snowball?

The future is unknown, my fellow investors. But I say,

Don' Bet Against The Fed


(Thanks to ETrade for charting this S&P 500 Index fund, symbol: SPY. You can buy and sell this basket of America's 500 biggest and best companies just like a stock. A monthly purchase of SPY shares makes an easy and diversified retirement vehicle. AC)

2 comments:

corkface said...

austin,
we are having that recession we talked about in sept. i agree with the fed stuf and i am long certain stocks here, but the housing mess is only in the 5th or 6th inning of a 2-1 games. supply is growing but the demand side of the equation is weak due to the billionaire who funded the last 5 years aren't playing in the commercial paper makets now. they will come back, when they get their money back. without the alt-A product that were available thru wamu, countrywie, indymac to name a few ccome back we don't bottom out for a while. northeast maybe this fall but west coast is next year for sure. banks stock should pull back here after this great run and then it will be time to not fight the fed and buy,buy,buy the banks.
later corkface

Austin Carr said...

Corkface, you've been 95% right about the depth of this housing disaster so far, and I must pay attention when you call for at least one more leg down. But funding long-term investments with commercial paper is a risky bet (mortgages in this case, but junk bonds and limited partnership payouts are two others with a bad history). A real strategy for disaster. Why won't the housing market punish the screw-ups and move on? Aren't mortgage rates dropping to a point that will allow some refinancing?