The Federal Reserve cut interest rates by 50 basis points today. Despite the 10 minute (or so) squeeze, it was a profitable buy until later in the day when the Dow gave back most of its gains. Market commentators claimed this way due to bad news about Ambac and MBIA. Unfortunately for them, the news about Ambac and MBIA was out before the cut and no one reacted to it. I think the likelier explanation is that three days ago the discussion was 75 or 50 basis points and today it was 25 or 50. If the cut were 75 based on the information from 3 days ago (ex GDP-advance numbers at only .6%), then I would have thought the market would behave exactly how it did today. Go up huge and give back its gains when people realize the problems are worse than people realize.
For some time, I have been very bearish on the market. For one of my econometric classes, I developed a statistical model to estimate the probability of a recessions that's very similar to Merrill Lynch's model (I compared indicators from Kasriel and Mish). That model began predicting a recession in the next six months back in June and was giving scary readings as early as April. However, right now there is a competing influence that adds significant uncertainty to how bearish I am for the intermediate term (next 3-6 months). True, the housing crisis is a disaster and the stimulus plan and the rate cuts ultimately will harm the economy much more than it will help it. However, for as many bad numbers that come out, there are good numbers as well. What worries me most right now is inflation. 125 basis points in 8 days is a recipe for disaster if the economy isn't as bad as people think. Inflation is 2.6% right now and if the economy doesn't significantly slow or enter a recession, then inflation will come back with a vengeance, most likely after there has been significant time for the housing crisis to truly be felt. So if I were holding/shorting stocks for the next 3 to 6 months, I would most likely get out into something safer until I could figure out where the general market would stand. The fed might cut one or two more 25 basis point cuts over that period and treasury bonds and tips will likely do well over that period. While I am bullish on commodities, industrial commodities will not do stellar in a slowdown or recession. Gold is still a buy if it pulls back.
Lastly, I've been reading Intermarket Analysis by John Murphy. I have to say it is probably one of the best books out there on technical analysis for the person with longer time horizons. Murphy centers his discussion on interpreting trends among many different markets and it is pretty good. It amazes me when (most?) economists say they put all of their money in index funds. They are trained to study markets and rather than put their money where their mouths are, they give up. Especially when most of the trends can be seen a mile away.
