Tuesday, March 18, 2008

Market Reaction to Fed Rate Cut: Another 400-point Rally

Now that's what I call a rally. The S&P 500 surged +4.2% today, its biggest one-day gain since October 2002. Remember that date? It was the bottom of the last bear market.

Yesterday, I went out on a limb and said that it was likely that the "Bear Stearns Bottom" would mark the lows for the market. Today's action solidifies my views.

From a technical standpoint, I think that the SPX came close enough to my 1250 target to satisfy me. We also had a 90% up day (90% upside volume on NYSE) last Tuesday, and then again today. Those are rare, so 2 in a week is significant.

Also, the Fed has lowered rates from 5.25% t0 2.25% today. That is a huge injection of liquidity. And the loan facility measures they have put in place to provide a backstop to financial institutions mean that the "Don't Fight the Fed" mantra is now in full force.

And we have certainly seen extreme bearish sentiment to help the market bottom:
  • The 10-day CBOE put/call ratio hit 1.27, it's 3rd highest reading since 1995
  • The 10-day ISEE hit 80, its lowest reading since the inception of this index
  • The Investor's Intelligence survey showed the most bears (43%) since 1998, more than during the great bear market of 2000-02
  • The AAII survey showed the most bears (59%) since 1990. wow.
  • The volatility index (VIX) spiked to 36 before plunging 20% today; this action is typical of past market bottoms

I don't think the market is about to runaway on the upside. More likely, we will be in a trading range for awhile as rallies reach resistance and get sold into, and more negative headlines lead to future selling.

But if the collapse of the 5th largest investment bank can't take the S&P 500 below the 1250 level, I doubt that future headlines will be able to either. And with the Fed on our side, I think that the market continues to heal itself with each passing day. If the Fed would actually step up and buy some Fannie/Freddie paper, then we could improve sentiment in the housing industry in a heartbeat. And that is really what's at the root of all our problems.


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