Lack of confidence has played a big role in the markets lately. When banks don’t want to lend to each other then fear has to be stronger than greed.
Tuesday’s 300 point drop in the Dow was based on disappointment that the Fed lowered rates only by ¼%. Wednesday, the markets (Dow) rallied some 272 points right out of the gate after the Fed’s plan of adding liquidity to credit markets received a warm welcome. However, enthusiasm faded fast as the markets dropped into negative territory by 111 points at its trough. That’s a huge range and shows utter confusion in the trading community. The reason: Lack of confidence in the Fed’s ability to deal with the crisis at hand. Only last minute upside activity pushed the major indexes into positive territory for the day.
I was reminded of that when I read MarketWatch’s feature story titled “Falling into the liquidity trap,” by economist Dr. Irwin Kellner. I have referenced his articles before, and I like his no-nonsense approach to analyzing economic events. Short, sweet and to the point.
He writes that “today there are some similarities to the liquidity trap of the 1930s. The credit crunch is clearly one of them. No matter what the Fed does on Tuesday, it will not be able to thaw out the frosty financial markets.
This is because the markets lack confidence. As I wrote two weeks ago, “fear, and not a lack of liquidity, is what’s freezing up the credit markets … and … it’s going to take a lot more than infusions of liquidity to thaw them.”
While I agree with his assessment, I am also aware that his article, and many others I have pointed to in various posts, do not give you any idea about market direction. It’s simply an unknown and the only way to make reasonable investment decisions is to follow the major trend. Markets will react to fundamental economic changes or crises in any way they see fit, but you can be certain that prices of underlying securities will reflect any change in sentiment, either to the upside or to the downside.
That change we can measure via our Trend Tacking Indexes, which only have one function: To keep us on the right side of the market.