Why Yesterdays Rally Is Happening Today

May 1, 2008 at 11:07 am  ·  Category: Federal Reserve, Market Commentary

Whenever the Fed says or does something that is subsequently misinterpreted, they have a few back door methods to correct the error. Two in particular were used fairly regularly. Call it the Fed edit/correction methodology.

When John Berry was at the Washington Post, he could be discretely contacted. He’s now the Fed columnist at Bloomberg, and while I’m sure he maintains his FOMC contacts, we haven’t seen him “break news” like his WaPo days. He primarily does analysis, and he is very insightful as to what the the Fed is thinking. That’s quite valuable, but its not the same as “getting the call.”

These days, that takes place with the WSJ’s Greg Ip.

With no one quoted, and no speech is cited, one has to assume this is straight from the horse’s mouth. The WSJ doesn’t print factual statements about the Fed on the front page without knowing this is precisely what they are thinking. That’s simply not how they roll.

“What Is The Fed Really Thinking?”, The Big Picture, March 27, 2007

The Federal Reserve cut interest rates Wednesday for the seventh time in eight months but signaled that one of its most aggressive rate-cutting campaigns in a generation may be nearing an end.

In a statement the Fed indicated that, although the economy remains under stress, the “substantial” rate cuts and other measures it has taken to lubricate the financial markets have reduced the risk of a severe recession. That language suggested that the Fed intends to pause in its rate-cutting while keeping the door open to more cuts if the economic outlook deteriorates.

The Fed’s decision to signal a pause….. [Bold and Italics added]

“Fed Cuts Key Rate, Signals A Pause” (subscription required), Greg Ip, The Wall Street Journal, May 1, A1

Sometimes you just have to laugh.  And the modern Federal Reserve system provides many opportunities to do just that.

Because of the power the Federal Reserve wields via its control of the money supply, a lot of money can be made by understanding their perspective.  That’s why Fed Statements are scrutinized like ancient tablets (see, for example, my “A Role For Ancient Sanskrit Scholars In Today’s Market”, Top Gun FP, March 21 2007).

Sometimes, however, the message the Fed wants to get across doesn’t.  Greenspan was notorious for his convoluted and incomprehensible remarks.  Bernanke is much more transparent, but even he fails on occasion to get the point across.

That’s where Greg Ip comes in – as Barry so nicely explained.

That’s what’s going on today as Greg Ip published a front page WSJ article titled “Fed Cuts Key Rate, Signals A Pause” (subscription required).  As I pointed out yesterday, the statement wasn’t really as hawkish as markets were expecting.  They were expecting more of a suggestion of a pause, more hawkishness on inflation, which would have led to a continued selloff in commodities and rally in the dollar and stocks.  They didn’t get the “pause signal” and so those moves reversed themselves somewhat with commodities rallying a bit and the dollar and stocks selling off (see also Bob Pisani’s excellent “Fed Statement For Traders: Blah, Blah, Blah”, Trader Talk, Wednesday April 30, 4:15pm EST).

Well, today Greg Ip is out telling us that the Fed did in fact signal a pause.  And so the rally we were supposed to have yesterday is happening today.

I wish I was joking.

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No Responses to “Why Yesterdays Rally Is Happening Today”
  • Thanks for the insight — AND for letting us know whom to read/follow.

    ~Nona  ·  May 1, 2008 at 8:36 pm  ·  Permalink
  • Hi Greg,

    What was that all about yesterday? Is Wall Street medicated to the point of glossing over reality?? Was breaching the 1400 mark open the door for an extended rally from here?? With summer in sight?

    Is the election playing a role in all this??


    Joe  ·  May 2, 2008 at 10:13 am  ·  Permalink
  • Hi Joe,

    “Is Wall Street medicated to the point of glossing over reality?”

    More like on crack! Just kidding.

    “What was that all about yesterday?”

    Basically, the emerging consensus set the tone for the response to the Fed decision on Wednesday. That consensus was that the Fed has done enough for the economy and that even though things will be tough, they won’t be catastrophic.

    Therefore, the best thing the Fed could do for the economy, given high commodity prices and a torched dollar, would be to hold the line on inflation. If they did that, that would cause a rally in the dollar and selloff in commodities, which is as viewed as good for the economy and therefore stocks. Hence, they wanted a clear signal of a pause and more hawkishness on inflation in the statement.

    But the Fed didn’t give it to them! Which is why we sold off after the decision Wednesday afternoon.

    But then the Fed went to Greg Ip, the WSJ writer the Fed uses to get its point across when it feels misunderstood (as Barry explains), and told them that really they did give Wall Street what it wanted. That’s why Ip mentioned “signalling a pause” so many times in his article. Everybody on Wall Street understands that Ip speaks for the Fed and so the rally we were supposed to have Wednesday we had yesterday (Thursday). Hence the title of my post.

    Very Orwellian don’t you think? Got to love our “free market” economy – wink wink.

    “Was breaching the 1400 mark open the door for an extended rally from here?”

    Maybe! LOL

    1400 has been an important level on the S&P 500 for a long time. It acted as support on the downside for the latter half of 2007 (https://www.topgunfp.com/the-technicals-are-bearish-watch-for-the-break-below-1400/) and it’s been resistance for most of this year (https://www.topgunfp.com/technicians-say-were-at-a-critical-juncture/).

    That said, “false breakouts” occur all the time. It’s true that we are now poised to close above 1400 for the 2nd consecutive day. But I don’t believe in mechanical application of technical analysis.

    I think of 1400 more as gravitational pull. The market can get above it but the farther above it gets, the more gravitational pull 1400 exerts to pull it back down.

    What I look for is a “decisive break” through technical levels. I use that as a qualitative term. Yesterday’s move was pretty powerful. Another day or two like that and the gravitational pull of 1400 could be broken. For now, however, my feel is that it is still very much in play.

    For example, 1270 was the intraday low from Jan 22. The S&P got as low as 1260 on the morning of March 17. But the move didn’t hold. Technically, it broke support at 1270. But it wasn’t a “decisive break” in that it didn’t last more than a few hours. Even though the low was technically broken, from a more holistic perspective the January lows actually held, exerting their gravitational pull when the market briefly pierced them.

    I like to see a move that shows “pure disdain” for previous technical levels. When I see that, that’s a game changer.

    Haven’t seen it yet. In fact, just the opposite: 1400 seems to be showing some real gravitational pull. The indexes can’t get too far from it – at least not yet.

    Greg Feirman  ·  May 2, 2008 at 12:48 pm  ·  Permalink

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