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发表于 2009-3-23 07:12
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Is Fed Easing Actually Good for the Market?
February 18th, 2008 by Corey Rosenbloom
Is it really as simple as “When the Federal Reserve cuts rates, it’s great for the market” or “When the Fed raises rates, it’s bad for the stock market”?
Michael Panzer of Financial Armageddon recently asked this question, as well as provided an excellent graph detailing stock market returns and Federal Funds rate at his post “Is Aggressive Fed Easing Really Bullish for Stocks?”
This is a concept I’ve been at odds with the financial media for quite some time, but I felt alone in my view.
Traditional thinking goes like this:
“When the Fed raises rates, it chokes off money supply through higher interest rates and decreases capital expansion, so it’s bad for the market. However, when the Fed lowers rates, it’s great for the market for the opposite reason. With lower cost of carry rates and lower interest payments, companies can take on more loans and expand their business, as well as the consumer can purchase more items (including bigger purchases like houses and cars) on credit or loans (or mortgages).”
That’s absolutely true, but what does it mean when the Fed raises or lowers rates?
Typically, the Federal Reserve raises interest rates to prevent rampant inflation from runaway expansions caused by ‘easy money.’ If the Fed kept rates at 1%, then so many businesses would be expanding and consumers would be spending that inflation (through higher demand) will cause everyday prices to skyrocket as well.
The Federal Reserve lowers interest rates to stimulate a weakening economy to encourage businesses to expand and consumers to spend. If weak economic conditions are present, or predicted through fundamental forecasts, then the Fed typically will choose to reduce rates to stimulate expansion.
That’s excellent, but let’s look at some of the underlying facts behind this:
The Fed raises rates when business conditions are “too good” and the economy is expanding or is expected to expand.
The Fed lowers rates when business conditions are “too bad” and the economy is contracting or is expected to contract.
How does that relate to the market?
The Stock Market generally rises when businesses conditions are good and the economy is expanding.
The Stock Market generally falls when business conditions are poor or deteriorating.
Keep in mind that the stock market anticipates economic conditions (discounts them) by a factor of three to six months in advance.
So what might it actually mean (in simplified terms) when the Fed raises or lowers rates?
When the Fed raises rates, it means economic conditions are good, and the stock market is expected to rise.
When the Fed lowers rates, it means economic conditions are poor (or becoming so), and the stock market is expected to fall.
Before you scream “foul,” let’s look at the excellent 10 year chart from Michael Panzer that expressed this sentiment far better than any words could:
(Image Credit: Financial Armageddon)
Notice that the market (S&P 500) was rising into 2000, and interest rates were rising as well.
Notice that the market began to stumble in 2000, and then fall, and Interest Rates fell right alongside the market.
Notice how the market bottomed in 2002/2003, and as the market rose through 2004-2006, the Federal Funds rate rose as well.
Finally, notice how the market fell in 2007/2008, and the Federal Funds rate fell as well.
Also, notice the flatline periods in the target rate. This indicates likely turning points in the campaign by the Federal Reserve, but also indicates long-term investment shifting points from into the market and out of the market.
A simple strategy (that flies in the face of conventional wisdom) might be buy stocks when the Federal Reserve is in a campaign of raising rates and be in bonds (which rise as rates fall) when the Federal Reserve is in a campaign of lowering interest rates.
The next time you hear a Wall Street pundit scream because the Fed raised rates, or jump with jubilation because the Fed lowered rates, think back to this chart and what that actually means.
(Post sponsor: MarketClub and INO.Com. Visit them for more market education)
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UTX Chart Wonders
February 17th, 2008 by Corey Rosenbloom
United Technologies (UTX), component of the Dow Jones Index, has recently ended a multi-year uptrend through some highly volatile downside price action. Let’s look at the history of this stock’s chart pattern through the last few years:
Monthly Chart:
While the monthly chart shows a magnificent uptrend since 1997, the recent action represents a mere pullback or correction against the strong, underlying trend. Price has found support at the rising 20 period moving average, yet time will tell if the bulls continue to hold this area as support.
Notice the textbook symmetrical triangle pattern which unfolded exactly as the classic textbooks project. Notice the measuring rule (price projection) that achieved its target perfectly following the breakout of the triangle consolidation zone (purple arrows).
The 20 period MA has served as support in the past and we’ll see if it happens again this time.
Onto the Weekly Chart:
Again, we see a strong uptrend in price, and support coming from both the 20 and 50 period moving average.
Currently, price is trapped beneath these key averages, and the weight of force seems to be pushing price downward, as price broke the 50 period average briefly. The averages themselves still remain in the most bullish orientation possible, but price has now broken into a confirmed downtrend on the weekly chart (with lower high and lower low, combined with two new momentum lows and moving average violations).
While the fundamentals may still remain strong, even stocks like United Technologies can’t always overcome the pressure of a falling overall stock market.
Keep your eye on this stock. If the uptrend resumes, we could see higher prices yet to come, but it seems likely that price will attempt a test of the rising 200 period moving average at some point, which would take price down to $60 or below before making a new run higher. Let’s see!
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A Quick Look at the Weekly Charts
February 16th, 2008 by Corey Rosenbloom
Let’s look at how the weekly charts of the S&P 500, US Dollar Index, Commodity Index, and 30 Year Bond Index have set-up:
First, the US S&P 500:
The S&P 500 Index is currently trapped between the key moving averages, but is beneath the 20 and 50 period average. I have added arrows to highlight key support and resistance via the moving averages.
Price is in a confirmed downtrend, and is forming a possible consolidation (indecision) pattern. It would not surprise us if price re-tested the 200 period moving average.
The US Dollar Index:
The US Dollar Index continues to threaten to make new price lows, as the key moving averages are in the most bearish orientation possible, and have been so since early 2006. The 20 period average is serving as key resistance, and has done so numerous times.
A momentum divergence has developed, which has resulted in a price consolidation. Is a reversal at hand? The odds don’t seem to favor it.
Next, the $CRB Commodity Index (which often trends inverse the US Dollar):
As expected, the Commodity Index responded to the US Federal Reserve’s decision to slash interest rates by rising precipitously, almost to the day from where the Fed started cutting.
Lower interest rates help fuel demand for certain commodities, and the fact that investors are turning to gold and other commodities for protection (hedge) against a possible global showdown has added fuel to the fire of the commodity boom.
Typically, the Federal Reserve raises interest rates to protect against inflation, but higher commodity prices often translate directly into higher inflation (oil prices, etc), so what is the Fed to do? That’s a whole other lesson.
Finally, US 30 Year Bond Prices:
As the US Stock Market has been falling, US Bond Prices have been rising from a dual-pronged approach: Lower Yields (cut by the Fed) mean higher bond prices and also economic uncertainty has driven up investors’ appetite for bonds (as a less-risky asset).
Recall that these four markets (and many others) are often directly related, and price trends in one market affect price trends in other related markets. Inter-market analysis is a fascinating concept, and I recommend you study more if you aren’t sure how markets trend together or apart as a result of their underlying structure.
Visit sponsor MarketClub or INO.com (excellent educational videos) for more information.
Have a great weekend and de-stress a bit from the wild ride we had this week in the market. I’m sure more volatility is ahead!
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Great Divergence Resolution Example
February 16th, 2008 by Corey Rosenbloom
Friday in the stock market gave us an almost ideal example of the classic rolling momentum divergence and balanced shift in demand from sellers to buyers. Let’s view the pattern:
This is the DIA 5-minute chart.
Notice the higher lows that continuously form in the momentum oscillator as price makes new intraday lows. Eventually, the price will (likely) reverse because of the rolling or balanced divergence.
This is exactly what happens, as the sellers fail to push prices lower and buyers take over the battle. It almost forms a perfect ’saucer’ type pattern on the chart as you can feel the momentum building.
Notice also in the example how the moving averages resist price until price eventually breaks through, when the averages serve to support price.
Although yesterday represented yet another ‘failed gap fade trade,’ it provided an excellent educational example of a rolling momentum divergence.
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Let’s take a quick look at the base statistics for overnight gaps and fills for the month of February. 
