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Strategies & Market Trends : The Stock Market Bubble -- Ignore unavailable to you. Want to Upgrade?

To: Giordano Bruno who wrote (2815)	7/8/1999 9:58:00 PM
From: P.Prazeres	Respond to of 3339

Here is a write up on why the Fed moved last week... from the StockMotions.com Weekly Newsletter (http://www.stockmotions.com) ------ The Fed opened the floodgates and the waters came with full force! On Wednesday(last week), the Federal Reserve did what everyone had expected – they raised the Fed Funds rate by 0.25% to 5.00%. That alone would have been a bit sobering for the market. However, the announcement of a shift to a neutral bias literally triggered an avalanche of buying. Volume following the announcement literally exploded. The shift to a neutral bias was a total surprise to anyone who follows the market. One week ago, it was very hard to find anyone who even entertained the idea (including yours truly). The market interpretation of the move now assumes that no other rate hikes are in the future. But wasn't the Fed worried about “irrational exuberance”? Listening to comments by Fed officials over the past couple of months, one got the sense that the Fed was genuinely concerned with a frothy stock market. It was one area where inflationary pressures resided. Certainly the Fed knew what type of reaction a shift to a neutral bias would have…so why announce the shift…it would seem counterproductive to their “frothy” market concerns. Well, I have a few theories. First, the state of the market just one week ago. One week ago, many market internal indicators were in weakened states. There really wasn't much breathing room for any more market interest rate hikes. Fed officials may have realized this. By keeping a tightening bias, the bond market probably would have sold off and thus set off a market selloff….which in turn would have more than likely spread overseas…possibly hurting the ongoing recoveries. Since the ¼ point move was all but a certainty, the perception of the possibility of more rate hikes (by staying in the tightened bias) may have been too much for the market at this point. So they are left with two alternatives. 1 – don't raise rates 2 – go back to a neutral bias. Let's visit the first – the Fed doesn't raise the Fed Funds rate. The interpretation by the market could well have been that the Fed isn't willing to fight “inflation”….since that is a bad perception, then the market sells off…similar fall out as above. Finally, shift to a neutral bias while raising rates. It allowed the Fed to do what they had basically told the markets in the weeks prior and it allowed the stock market to recover from its poor technical state. It also gives the Fed the freedom to go ahead and raise rates again should they wish….and ironically, they could conceivably use the excuse that the equity markets are “frothy” again…..SIMPLY BRILLIANT! -------- sign up for the free weekly market newsletter @ stockmotions.com right now its newsletter tracking portfolio is up 28.09% for the year while usually maintaining over 50% cash...(currently short some net stocks after being long them earlier in the year) Paulo