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Courtesy of Scott Martindale, Sabrient
In case you hadn’t noticed, we have entered a fear-driven stock market. After a huge down day on Monday in reaction to the U.S. credit rating downgrade by S&P, Tuesday brought an incredible sequence of up-down-up price movement, with the final hour giving an unprecedented short-term rally driven by a combination of bargain-hunting and short-covering. Bears were sent back to their caves and bulls snorted with glee that the bottom was in (at least temporarily). But then today (Wednesday) brought it back to the reality that perhaps happy days aren’t quite here again.
All of this has come after last week’s weakness that sent the market to what seemed like extreme oversold levels. As you can see, it can always get more oversold.
The truth is, the FOMC’s announcement on Tuesday that they would keep interest rates low indefinitely merely highlighted the fact that the economy has slowed and they have run out of bullets. They talked about “dramatic risks to the economy,” and they had an unusual number of dissenters (3) to the final decision on rates. Now we face a situation in which the FOMC has all but admitted that their hands are tied, while the pressure remains on Congress to take on austerity measures to get spending under control. Some observers think that is the wrong approach for a struggling economy.
What more can I say about this week’s craziness? There is no shortage of opinions out there. In fact, it seems those bearish on the market get more emboldened and squawk on Twitter while the market is going down, but then they get quiet as it roars back up, while the bulls get bold in their messages. On balance, I think the airwaves are generally dominated by those with something negative to say. My inclination is to not add much more to the pontificating, but I’ll offer a few observations.
First, you would think that S&P’s untimely downgrade of U.S. debt last Friday would have resulted in a flight from bonds and higher interest rates, but the opposite happened, as cash has moved from stocks to bonds. A flight to safety still targets U.S. Treasuries, no matter what S&P has to say about it. The European debt crisis is still the elephant in…
