Stalking Stocks with the Shark - 04.30.08

Fed Punts On Weak Dollar And Inflation - 04.30.08

Greetings Shark Investors:
Although the major indices spent the majority of the day sporting decent gains as investors looked forward to a positive response to the FOMC interest rate decision, the reaction was anything but, and the market suffered through a late day sell-off to finish Wednesday’s trading session in the red.

Despite indications for a somewhat softer open to the trading day early in the morning, better than expected readings on first quarter GDP as well as the ADP employment report helped the index futures - as well as European markets - moved higher as we approached the bell. As such, the market began the day in the green, but interestingly, the initial leadership was not in the areas that many had been expecting.

As we’ve been discussing over the past few days, market players have been anticipating that the Fed would acknowledge the fact that the parabolic rise in commodity prices have begun to really hamper the growth prospects for the economy and that they would adopt a more hawkish tone when they announced their interest rate decision later in the day. As a result, those stocks that have been benefiting from a weaker dollar have spent the past several sessions pulling back, while the dollar has bounced and investors have tentatively dipped their toes back into financials, technology and consumer discretionary names.

However, even though materials and energy stocks popped at the open and some heavy selling pressures hit the financials, as the morning wore on and we worked our way closer to the Fed decision, that rotational theme began to develop once again. Unfortunately for those who placed big bets ahead of the news, however, the Fed wasn’t playing along.

While they did deliver the 25 basis point rate cut that was widely expected, the wording in their policy statement wasn’t nearly as hawkish as many had hoped. In it, they reiterated their expectation that inflationary pressures would “moderate in coming quarters” as commodity prices “leveled out”, and that continuing turmoil in the credit and housing markets would “likely weigh on economic growth over the next few quarters.” Outside of a nod to the substantial actions they had already taken, there was no hint as to whether or not they were done with cutting rates for the time being.

Basically, the Fed punted on the issue, and once the typical whipsaw action settled down after the news was digested, the market lost all it footing and fell quickly into negative territory as we headed into the final hour of trading. Not surprisingly, most of the selling was concentrated in tech and financials while the euro, the yen and gold bounced strongly.

Over the past several days, we’ve been saying that, while we expect a rotational theme to play out as we move forward, we didn’t expect the transition to be smooth, and today’s reaction to the Fed was certainly a bump in the road. We’ve also been warning that, with the averages bumping up against overhead resistance, we would be surprised to see a pullback as market players move to protect some of their recent profits.

Should we see this pullback develop over the next several days, however, it will be essential for the averages to find support above recent lows. This market has established a nice intermediate uptrend since putting in a double-bottom last month, and it will be important for the series of higher highs and higher lows we’ve seen since then to continue in order for this market to gain the sort of momentum required for it to push convincingly past lateral resistance levels.