Global Interest Rate Cut – If The Market Is Up After 3:00 ET – Get Long!

October 8, 2008
Author: Peter Stolcers, Founder of OneOption

In the last week the market has shed 17% of its value. Any rally has immediately been met by selling. This is an extreme credit squeeze. As much as hedge funds want to hold positions, they have to liquidate. Investors are pulling out as fast as possible. Quant models balance longs and shorts and they are not working. Regulators banned the shorting of financial stocks and hedge funds were forced to cover. They were over exposed to commodity stocks because they traded at low P/Es and had high growth rates. Commodity stocks rolled-over and the bottom of that sector fell out as everyone hit the exit at the same time. Widespread leverage is haunting the market because there is a lack of liquidity. Banks are struggling to improve their balance sheets and they don't want to lend the money. In essence, they are hoarding cash. Yesterday, the market staged a nasty decline and traders were hoping for a coordinated interest-rate cut. For the first time ever, the ECU, Switzerland, Canada, Sweden, England, the United States and others dropped interest rates in unison. International monetary officials recognize that this is a global crisis and they are doing what they can to prevent a financial collapse. Pre-open, the market staged a rally on the news. That move quickly reversed and before the opening bell, the S&P futures were down over 30 points. As you can see in today's chart, there has been volatile, two-sided action. That actually comes as a relief. During the last week, no one has dared to place a buy order. Now at least there is a tug-of-war. I would like to see a major drop and a snap back rally into positive territory today. The long-term problems won't go away anytime soon, but this decline is way overdone. At this stage, the market has more than priced in weak economic conditions. If the market pokes into positive territory after 2:00 PM central time, get long. This is setting up for a very tradable bear market rally. I particularly like technology and agricultural stocks. image

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