Tuesday, October 28, 2008

Dow back above 9000

Voltron says:

First of all, to those of you who sold SRS at 200, I salute you! If you want to know why the market was up today, just look in the mirror. It was short covering. You could press your advantage and get back into SRS at 133! Best of luck.

The consumer confidence index fell to an all time low of 38, well below economists expectations of 51. It was also announced that house prices in August fell by a record 16% year-over-year. So what followed . . . the 2nd biggest rally ever in the DJIA (pointwise). The biggest ever was about two weeks ago on Oct 13th which brought the DJIA to about 9,400. Despite those two rallies, we are still below 9,400 now, so don't get too bullish yet.

Also, trading volume was only average, making it unlikely that the rally will stick.

So what happened . . .

According to a Bloomberg article, the Fed began making commercial paper loans today in an attempt to unfreeze the credit market.

The "VIX" Volatility Index (chart) which usually oscillates between 10 and 40 and has lately been as high as 90, is now back down to 66, so stock options are cheaper.

The market thinks that the Fed will lower the target rate by 1/2 percent to 1%

It all comes back to the inflation vice deflation debate. Did today's rally mark the end of deflation? Clearly what the Fed and Treasury are doing is inflationary. Bonds and the dollar moved lower but not more than I would expect on a day stocks went up so much. I don't think we are done with deflation yet . . . I'm staying short the market.

If the market continues to rally tomorrow due to expectations of a Fed rate cut, I may get out of DKA, DBU and DBN and try to get back in lower.

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