Thursday, June 7, 2007

Could the Fed be looking for a reason to cut?

First I want to show you something from the Nasdaq bubble. Two 12% drops right in the middle of one of the greatest parabolic runs. Neither one of them stopped the Tech train. So far the S&P is down 3% for the week. Just something to think about. I don't think the selling is quite done yet but I also don't think this bull is done yet. At least not until the COT gives me confirmation. So investors have a couple of options. Hopefully you are already familar with position sizing or at least paid close attention to my rant last night in the daily update. If so 3% isn't hurting you. However there's no need to hold on for 12% just in case that's what we're in for. First off you can just ignore the noise and wait for the COT to give you a signal or you can cut back on your size some so that if the decline does continue for a while it won't hurt you. I'm going to be looking for some kind of bottoming action before I put on my leveraged position again (which btw wasn't very much leverage).

Now I want to talk about something that I've been contemplating yesterday and today. This will sound a bit like a conspiracy theory and I may be entirely off base. So feel free to totally ignore what I'm going to say. Last year the Fed needed to stop the rate hikes. However gold was at $725 an oz. and oil was over $70 a barrell. How could they possibly stop hiking and still claim to be fighting inflation. They couldn't without some how bringing down commodity prices. Well the Fed raised one last time, while Goldman rejiggred the CRB to decrease the weighting of gasoline which caused massive selling of gasoline futures in index funds that have to match the Goldman weighting. At the same time I'm guessing we got a wave of central bank selling of gold to bring down the gold price. All in all they accomplished what they needed to do. They crashed the commodity markets allowing them to show that inflation was retreating and they could now stop raising rates. Well what's happened in the mean time. The housing bust has steadily gotten worse. Not good for potential voters next year. Gold was back up to $690, oil is touching $67 and gasoline has been as high as $2.43 in the futures market. The fed has been talking tough the whole time but what have they done? Not a damn thing, that's what. Well now GDP came in at .6% this last quarter and housing is showing no signs of improving. In my opinion the Fed needs to cut rates again but it can't do it with commodities where their at. They need to trigger a deflation again to give them cover to cut. Could it be that the Fed is selling treasuries into the market to raise rates and trigger enough of a scare to allow them to cut rates? I don't know. If anybody here does know where we can find out what the Fed is doing in the credit markets please post and let us know. I have a feeling we may be in store for another episode like last year. But if the goal is for the Fed to eventually cut rates that would explain why the COT is so bullish. Perhaps the smart money knows that the Fed only needs the markets to come in 6-8% again before they turn on the money spiggots. This week the S&P was up 12 points from last week and the NDX was up 33 points. If the COT still increases their longs then I've got to believe the big boys know something we don't. Again this is all just speculation so feel free to ignore everything I just said...except the part about the 12% drops in parabolic runs and position sizing. LOL