FOMC Day

by Larry Levin

Another drop in the oil market ignited a fire under the bull's right from the open today. The rally was on surprisingly low volume before the FOMC announcement that just wouldn't quit. In fact, I can't remember one time where I saw a huge rally that kept making new highs just 20-minutes before the announcement.

Most traders I spoke with didn't expect the FOMC to change rates today, but they did expect a more hawkish tone and more dissenters. These traders, and many long term investors, wanted to see the Fed raise rates a quarter point to show that it was serious about rising commodity inflation and falling US dollar. The Fed did nothing new and only registered one dissenter. Moreover, the policy statement was viewed as dovish.

Shortly thereafter I heard folks calling for rate CUTS by the end of the year, or possibly early in 2009. In an instant the market went from embracing the idea of a minor hike for the reasons mentioned above, to embracing rate cuts. Will that sentiment last? The upward trend was too strong to argue with today, so it went on up to the close. What will be interesting; however, will be the reactions of market participant if the US dollar is beaten down again while oil resumes its uptrend.

I haven't written much about this yet, but it's now quite clear that the Fed is more concerned with potential deflation than the current commodity inflation. Since the current commodity inflation has yet to reach most products other than food and fuel, and there is no wage inflation (which is what the Fed wants), then they will ignore the current problems. They are quite happy with stagflation as long as it doesn't morph into deflation.

Deflation will be fought with rate cuts down to ZERO (for the High Priests of finance only) if need be - just like in Japan from the mid 90's to just a short time ago. Currently, Japan 's interest rate is set by the BOJ at 0.5%. Did interest rates at ZERO cause a massive rally in the Nikkei? No. In fact, Japan has lost TWO DECADES of capital gains in its market. It is still down a staggering 67% from its 1990 high and trading around the same price as it had in 1988.

Clearly, if ZERO percent interest rates were the magic elixir that fixes all, Japan 's market would not still be in such a malaise.

Real Time Trading Signals*for

Trade Date: 8/5/08

E-Mini S&P Trades*
(before fees and commissions):

1) Wow, nothing filled today!

2) It was an odd low volume day to be sure.

3) Algorithm trades (2)...combined total...+8.75


E-Mini Russell Trades*
(before fees and commissions):

1) No ER trades today.


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