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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (22238)	10/21/2001 11:41:03 PM
From: Lee Lichterman III	Read Replies (2) \| Respond to of 52237

LOL... I just made this as one of my posts on our site.... I haven't written this weekend because I just didn't know what to say. Friday acted a bit strange and I had a hard time with the pits trying to get my prices so I ended up adding new postions instead of getting rid of them as planned. I basically hedged in all my longs since they were moving things up near end of day and decided to put in some ridiculous limit orders as I left for my doctor's appointment. Many of them hit. I ended up buying 2003 QQQ strike 40 LEAP puts and now am totally hedged against any drops down the road. Looking at my usual daily charts, I was wondering if that was such a good idea as it seems that we could continue to move up just eyeballing the fib retrace of the earlier gains and then two days of upward action. That left me slightly bullish. Then reality hit me, stock valuations are still near March 2000 highs when compared to earnings and probably worse when future earnings are taken into account. We had a huge nasty black candle last week that though is rare has always preceeded large drops weeks later if not only days later. Last my weekly charts are looking bearish. This left me with a bit of a paradox as I was comparing my daily reads with my weekly ones. Up until a few minutes ago, I really didn't know which to believe and I was and kind of still am of the opinion I will trade the ripples but fully expect a retest down the road so I will not be sweating my short postions since they are longer term. A couple minutes ago though I went to the "Hall of Fame Thread to post some scary excerpts from an article I read. When I finished and was looking over some of the old posts there, I ran across this which is highlighted different but I am now going to highlight the part that stood out tonight....... IBD: "It’s A Lesson Of History: 'Don’t Fight The Fed'" Mutual Funds & Personal Finance Monday, January 8, 2001 It’s A Lesson Of History: Don’t Fight The Fed But there are exceptionsto rule that stocks shoot up when rates go down By Ken Hoover Investor's Business Daily It’s hard to imagine anything better to wake up a sleepy stock market than a surprise cut in interest rates. Or two. Money managers know from experience that interest rates are the main engines that drive the stock market. "My firm belief is the Fed is in charge," said Fritz Meyer, who runs $200 million Invesco Growth & Income Fund. "When the Fed wants the economy to rally, it can make it happen. Stocks discount upturns or downturns in the economy or in earnings." Declining rates help the market because fixed-income instruments, like bonds or money market funds, compete with stocks for investors’ money. When rates drop, investors look elsewhere for better returns. More important, declining rates spur economic growth by making credit easier for consumers and businesses. That’s mainly what the Federal Reserve had in mind Wednesday when it cut the fed funds rate from 6.5% to 6% and the discount rate from 6% to 5.75%. Then the next day, it lowered the discount rate to 5.5%. It’s also what investors realized the instant the Fed announcement hit the wires Wednesday. They sent the market soaring — for one day. Faster economic growth brings bigger earnings increases and higher stock prices. But does this rally have legs? Friday’s market slump makes investors wonder. IBD looked at every instance the past 40 years when the Fed cut the discount rate for the first time after a round of rate increases. There were eight times before Wednesday. And in every case but two, the market had already come off a bottom and was rallying. A bull market continued for months or even a few years. One exception was June 10, 1960. The Fed trimmed from 4% to 3.65%. The S&P 500 dropped another 9.95% through Oct. 25 before a powerful rally began. By then, the Fed had cut three more times, to 3%. The other exception was Nov. 2, 1981, when the Fed cut the discount rate from 14% to 13%. The Fed had declared war on inflation and jacked interest rates up to record levels. The country was in recession and the middle of a bear market. The S&P 500 fell another 17.54% until Aug. 12, 1982. But there’s a catch: The Fed waffled in its resolve to get the economy moving. It raised the fed funds rate while lowering the discount rate. Four days off the Aug. 12 bottom, the Fed pared the discount rate for the fifth time, from 11% to 10.5%. That did it. The market took off like a rocket. The S&P 500 was up 20.2% by Sept. 15. The impressive run-up lasted another 10 months. Tim Hayes of Ned Davis Research studied every rate cut since the Federal Reserve system started in 1913. He used the discount rate until 1989. Then he used the fed funds rate. There were 21 first-time rate cuts, by his count. The Dow Jones industrials were up an average of 19.92% a year later. Rate cuts are like expensive pieces of chocolate to the Fed: It can’t stop with one. In 17 of those 21 instances, the Fed lowered rates a second time, and in 12 instances a third time. It keeps dropping rates until the economy improves. Hayes’ research shows the biggest impact comes after the SECOND CUT. The market was up an average 28.4% a year after a second cut. Stocks keep rising on the third or subsequent rate cuts by lesser amounts. When economic activity starts to fan inflation fears again, the market advance peters out. By then, investors are looking ahead to rate increases. There are exceptions to the rule, Hayes notes. "There is the exceptional situation where the rate was cut early in a recession. The market didn’t react well," he said. That was the case in 1960 and 1981. It was also the case in 1929 and 1957. Hayes also looked at periods after the Fed dropped the rates once and then again after it cut twice. Out of the 21 previous occasions, in only four did the Dow keep declining until the second cut was made. In every case but one, the Dow rallied, usually powerfully, after the second cut. The striking exception was an initial discount rate cut on Nov. 4, 1929, right after the crash. The Dow lost another 11.2% until the second cut nine days later. The Dow rallied until April 1930, then tanked massively. The Fed started another round of cuts on Feb. 26, 1932. The Dow dropped 45.4% before a second cut on June 24. That did it. The Dow was up 113.4% a year later, according to Hayes’ research. There’s a caveat to all this research. Just because the Dow is up a year after a rate increase DOESN'T mean it’s easy to make money. Many investors remember 1989. The Fed dropped the fed funds rate for the first time on June 6 of that year and again on July 6. But on Friday, Oct. 13, the Dow fell 190.58 points, or 6.9%. It rallied back until the end of the year, then suffered a nasty 9.5% correction during January 1990. Then the market clawed its way upward until July when Saddam Hussein invaded Kuwait. That sent the market into a tailspin. ======================== That is right, never before in the entire history of the market have we not rallied to positive ground within a year following two rate cuts much less nine of them and here we a year later and down even further than before with things looking glum FA wise which even if we tried to rally would limit our upside since we are starting from historically high valuations already. People we are pioneers in a totally new and unprecedented market environment. Even if you were 209 years old, you would have never experienced anything like we are going through right now. Where are we going to go tomorrow, heck if I know but I would bet that we won't be a whole lot higher before we at least retest the lows longer term. I plan on trading ripples but I will be holding all my short hedges and have a feeling I will make more off of those protective hedges than I will from the longs I play in the next year. BWDIK PS - GLOBEX triggers are negative biased for tomorrow's open. A positive S&P futures of less than 1 1/2 is still a sell program trigger. Also more bad news, my knee didn't heal enough for me to go back to work yet so they gave me another week off and you know what that means. Weird markets and a lot of non movement mixed with totally irrational gaps. Looks like I missed my chance to go play war also. This will be the first time I had to stay home and watch it on the news in my career including things that never made the news. Feels weird. Good Luck, Lee