Rescue Rally

Faced with economic weakness and bond market paralysis, the Fed has stepped in to help numerous times over the last year, via rate cuts, sharp rhetoric, and a growing array of “credit facilities” designed to benefit specific groups. Each time the result has been the same: a few days or weeks of recovery, followed by another downturn. What about this time? Has the Fed finally put its finger on the problem? Was Monday the bottom?

Today’s 419-point surge in the Dow was certainly impressive. It began when two key brokerage firms, Goldman Sachs (GS) and Lehman Brothers (LEH) reported earnings that were not nearly as dire as Wall Street expected. This prompted a surge in financial stocks which accelerated after the Fed’s interest-rate announcement. The Fed statement was typically inscrutable. It is still unclear whether bernanke and his colleagues are more worried about inflation or recession. Moreover, we note that two committee members voted against today’s decision. We do not remember the last time this happened; usually the decisions are either unanimous or have one dissenter at most. This suggests that there is still significant disagreement at the highest levels of monetary policy.

From a technical perspective, the S&P 500 closed today very close to its March 12th intraday high. Long-term and intermediate-term trend indicators are still bearish. The best we can say for this market is that it seems to be entering a short-term uptrend. All major trends start as minor trends, of course, and further gains from here would bolster the bullish argument. The underlying facts that created the current situation have not changed: home prices in most markets are very weak, and mortgages remain very hard to get for those with less than excellent credit. When that situation resolves itself, we’ll find it a lot easier to be bullish.