Tuesday, August 07, 2007

FOMC Statement Offers Little, But Market Rallies Anyway

The Fed held rates unchanged today at 5.25%, as was widely expected. Bulls were hoping that they would go to a 'neutral' bias, or at least explicitly acknowledge that they see the risks in the credit market and will act accordingly.

But alas, the Fed is almost always behind the curve. They don't usually react until well after they should. In this light, the Fed maintained its tightening bias today, stating that its "predominant policy concern remains the risk that inflation will fail to moderate".

They did offer investors one very small nugget, in saying that they recognize the "volatile" markets and "tighter" credit conditions. But that was about it. So this statement does little to ameliorate the conditions that have been developing in the credit markets.

The market sold off hard when the statement was released, with the Dow dropping a quick 150 points. But it then recovered, and rallied fairly hard into the close. This is what happens when a market is so oversold that it just can't drop any further.

The ISE Sentiment Index made a new record intraday low at 43, implying retail investors continue to load up on bearish put options. I suspect this market has a little further to go on the upside, but then we will likely be in for some sort of retest.

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