Thursday
Jun292006
FED Raises as Expected: Frenzy After and Anticipate Economic Event Means Follow Through.
June 29, 2006 at 2:00 PM
June 29th US Equity Index Moves:
Before a widely anticipated event like today's FOMC 25bp rate rise and economic commentary, traders typically reduce speculative positions and delay decisions. Big market moves after a completely anticipated event usually mean there will be follow-through. Today, for example, traders and portfolio managers held money in cash until AFTER they saw if there were any surprises. When there were none (I don't think they Fed statement should come as a surprise), they had to put that money back to work in the market. The fact that the markets were up so much today tells me that stocks were underowned. The cash on the sidelines had to rush in. In my experience, nobody has the guts to buy everything they need to in one day. This means there is still cash that must go into the market. We will see follow-through tomorrow. I bet it will be most evident in the sectors that have been avoided the most: banks and brokers.
Later, when this frenzy is over and long rates rise more because of continued bad inflation data, bank stocks will fall again. Even if rates do not rise, the inverted yield curve will scare investors out of banks. Either way, bank stocks fall. And they will be cheap - I will buy them.
|
DOW JONES INDUSTRIAL AVERAGE
|
 217.24 |
1.98% |
|
NASDAQ COMPOSITE
|
62.54 |
2.96% |
|
S&P 500 INDEX
|
26.87 |
2.16% |
|
PHLX / KBW BANK SECTOR INDEX
|
2.12 |
2.00% |
Before a widely anticipated event like today's FOMC 25bp rate rise and economic commentary, traders typically reduce speculative positions and delay decisions. Big market moves after a completely anticipated event usually mean there will be follow-through. Today, for example, traders and portfolio managers held money in cash until AFTER they saw if there were any surprises. When there were none (I don't think they Fed statement should come as a surprise), they had to put that money back to work in the market. The fact that the markets were up so much today tells me that stocks were underowned. The cash on the sidelines had to rush in. In my experience, nobody has the guts to buy everything they need to in one day. This means there is still cash that must go into the market. We will see follow-through tomorrow. I bet it will be most evident in the sectors that have been avoided the most: banks and brokers.
Later, when this frenzy is over and long rates rise more because of continued bad inflation data, bank stocks will fall again. Even if rates do not rise, the inverted yield curve will scare investors out of banks. Either way, bank stocks fall. And they will be cheap - I will buy them.
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