The Bulls, the Bears, and the Tea Leaves

Written By Brian Hicks

Posted May 8, 2007

In a move that has become all too common these days, the bulls managed to do it again. The Dow closed higher yesterday for the fifth straight session, reaching another all-time record and sending the bears even deeper into the woods.

Stoked by more merger news, the Dow added another 48.35 points on Monday to finish the session at 13,312. It was a far cry from the correction bottom of 12,000 reached only nine weeks ago.

The move higher marked its 24th positive move in the last 27 sessions, matching a record that has stood since 1927, a year that came and went long before most of us, or even our parents, were born.

But while the bulls continued to party on like there was no tomorrow, the sun actually did manage to rise today. And when it did, the once hot market suddenly turned cold.

The markets dropped sharply during the day before closing with a small loss. By day’s end, the record streak had ended.

For now at least, the party looks like it has been put on hold. The Fed is back in town.

At least that’s the case for the next two days, as Ben Bernanke and his cohorts gather in the temple to discuss future monetary policy and read the tea leaves.

The bulls, of course, will be looking for a rate cut, while the bears will secretly be hoping for a cut. Neither will likely get their wish.

The smartest guy in the room and his central banker buddies are expected to once again leave well enough alone, keeping rates unchanged at 5.25%. Conflicting data on economic strength and inflation will likely mean an extended pause.

Because, let’s face it, when it comes to rates, the Fed is still clearly between a rock and hard place. Raising them would further cripple economic growth, while cutting them would help to seal the fate of the dollar. Luckily, those two choices are not the Fed’s only options.

That’s why a pause is so widely expected.

The end result: The markets will be left with little to digest other than the chicken entrails buried within the Fed’s statement. Divining their meaning will set the tone for future market action.

That’s means that just like the last FOMC meeting in March, tomorrow’s statement will be all about the language–specifically its tone on inflation.

To the markets those words will be no small issue, and the Fed knows it. Its remarks on inflation alone could kick the market 100 points in an instant in either direction. That’s why the central bank will craft its statement very carefully. But even then its inflationary bias could be easily misread by the markets.

That will likely make for some short-term volatility and some weakness going into the Fed’s announcement. The language though, is expected to be tame.

That’s good news for investors–markets, after all, love stability.

Without any major surprises likely from the Fed, the markets can simply go about their business, which in this case has been to climb higher on the "wall of worry."

And it’s not just the Dow that has been making headlines.

The continued rally has been broad-based. The S&P 500 and the Russell 2000 are both within striking distance of their all-time highs, while the NASDAQ has quietly managed to reach it highest point since February 2001.

Smart investors should be looking to get in or add to their positions on a pullback, since no rally–especially not record rallies–can go on forever. In fact, this week’s dose of Fedspeak may actually provide the opening that so many have been waiting for.

Look for a retreat to the Dow’s 10-day moving average (DMA), or better yet its 20 DMA, since any strength on the asking side at those levels would likely provide a set of good entry points.

In the meantime, all we can do is wait and hope that the smartest guy in the room will throw us a bone or two.

It seems silly really, but for now at least that’s what will be moving the markets.

By the way: Cisco will report its quarterly results today after the close. The networking giant has beaten the Street now for eight straight quarters, and by most accounts is well on its way to a ninth. The explosion in bandwidth demand is once again expected to lead the way to higher results.

Wall Street is looking for earnings of 33 cents/share and continued 20% growth to $8.76 billion in sales.

 

Wishing you, happiness, health and wealth,

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Steve Christ, Editor

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