Give me some Dramamine! Today's manic market finally got up off the mat, and closed up 110 points on volume of just shy of 2 billion shares. Today's rollercoaster ride was even nauseating for the bears who eventually threw in the towel around 2:45 EST.
While today was a good start, the market should begin working off its short term oversold position, and prepare itself for the upcoming Fed meeting on June 29th. If the Fed reacts as we suspect it will, the final rate hike for this cycle will probably be followed by the highly anticipated "pause".
Some are now saying the Fed Funds Futures are pointing to a potential rate hike in August. We have been saying for quite some time that "Cost Push" inflation (the increase in the prices of raw materials & price shocks-IE: energy) is our biggest problem.
Now that the costs of raw materials have come down a bit, helicopter Ben may be in the mood to pause and survey the damage.
Keep in mind that the Fed can do very little to curb "Cost Push" inflation. The only resource at their disposal is to drive the U.S. economy into a recession by continuing to raise rates. Higher interest rates usually have a way of curbing investorç—´ appetites for buying homes which results in less demand for the raw materials that go into construction.
Even with this card in his arsenal, I don't think Fed Chairman Bernanke wants to use this card just yet. He may a little later, but crippling the U.S. economy immediately does not exactly fit his profile.
Since each rate hike takes about 12 months to filter through the economy, I would think the wise move would be to pause.
Here are two scenarios to consider over the next 10 days;
1) The market remains hopeful that Bernanke will announce a pause after raising rates another .25 basis points on June 29th. The market will drift higher over the next 10 trading days to around 11,000 on the Dow and just shy of 1300 on the S&P. At this point, the market will squat and wait for the Feds decision on future rate hikes.
If the Fed raises rates, and the calls for a pause, the Dow will rally immediately to around the 11,300 level, and the media will be screaming about one of the biggest one day rallies in the markets history.
Or
2) The market remains hopeful that Bernanke will announce a pause after raising rates another .25 basis points, and the Fed does not pause. Oh, no.
The Dow will react violently on the downside, retracing all of the gains for the past 10 days. The one day loss could carry the Dow back to the 10,700 level in one day, and eventually cause a "real" capitulation a day or two later which could take the index down to the 10,300 level. The S&P would go back below the 1240 mark, and capitulate a day or two later around the 1175 level.
Some kind of rebound would occur after reaching these semi-panic levels, and we may get a decent attempt at a summer rally.
These are just some thoughts, but some things to keep in mind.
Now you know why I have been saying that playing the final rally in a cyclical bull is "Edge of the Cliff Investing".
