Securities Research Services

Tuesday, August 08, 2006

Looking to Fade a Potential Fed Rally

Today the Fed is likely to take a pause on rate hikes. The market expects this, but such an event should spark a quick rally nevertheless. Unfortunately a pause at this stage is not going to clear up the worries that this market has in front of it. A pause this time does not take away the question about whether or not the Fed will choose to pause next month. As such, any quick rally after the release – or prior to the release in anticipation – is likely to be quickly sold. Indices and stocks alike are now technically overbought and rallies are generally sold when this is the case. Due to this long string of rate hikes, there are strong indicators pointing to a recession next year and the market knows this. The only scenario that might spark a legitimate rally would be an actual lowering of rates this round as it would indicate that the Fed is concerned with the health of the economy and the market. From what we can gather, however, it appears that the Fed is more interested in fighting inflation in the commodities sectors than it is in the current stock market outlook. This is why, we believe, stocks are projecting more downside.

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