Wednesday, October 29, 2008

Fed Cuts Rates By 50 Basis Points To 1.00%

The FOMC lowered interest rates today by 50 bps, as expected. Given the fragile markets, I don't think the Fed wanted to do anything to upset the markets, so it gave them the 50 bps cut that everyone was looking for.

Here are some of the comments from the press release today:
  • The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.
  • Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
  • In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
  • Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth.
  • Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
The market was up quite a bit with 15 mintues left in the trading session, and then out of nowhere a sharp selloff erased the entire day's gains. Here is how described the bizarre action:

"The Dow dropped almost 450 pts in the last 13 minutes of trading following a Dow Jones headline indicating that GE wants to keep 2009 profit the same as 2008. Based on current consensus estimates, GE is seen earning $1.96/share in 2008 and $1.78 in 2009. Hence, flat earnings would actually represent upside to current consensus. However, the price action in the stock (GE fell 5.3% following the headline) suggests that traders/investors assumed that the comment was an earnings warning -- leading them to sell GE. This swift move lower in GE pulled down the Dow and S&P 500, leading traders to hit the exits and causing the market to cascade lower."

"Coincidentally, the GE news hit at the exact same moment that the Dow was testing its intraday highs, which also triggered a technical sell signal. Given the volatility that always occurs on FOMC policy days, traders were sitting with their fingers on the sell key. The GE breakdown and intraday technical failure gave them a reason to unload."

The VIX was also lower on the day, but a late spike pushed it back up near 70, so it looks like we are still going to have to wait for a lower VIX. That said, I am growing incrementally bullish for a trading opportunity. I think the recent test of SPX 850 was successful, and that the market should enjoy an upward bias for a least a few weeks.

I will be looking to use near-term weakness in the market to add some expsoure via more ETFs and add to a few large-cap tech favorites.

long VIX puts


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