The markets were more or less meandering yesterday, when the Fed threw a long unexpected pass to Wall Street, which saved the day.
The assist came in form of an announcement (see arrow in chart) that they would inject some $1.1 trillion in an effort to support the economy.
Wall Street nodded approvingly, and the rally was on. The decision to leave interest rates unchanged was probably the worst kept secret, but the additional spending was a surprise. Here’s how the money will be doled out:
1. $300 billion will be spent on the purchase of Treasury securities,
2. $750 billion will be used to buy mortgage backed securities from Fannie and Freddie
3. $100 billion in debt purchases from Fannie and Freddie
There you have it. We are now in the stage of printing money to buy our own debt. This only indicates to me that the Fed is very worried about the economy and the housing market in general. From what I’ve read, this goes against what Fed Chairman Bernanke said last weekend that things should be improving later on this year. It again proves the old adage when it comes to official announcements that the key is to watch what they do and not what they say.
To view these actions as a positive for the stock market is simply looking at things on a very short term basis. While this current market rebound is great for traders, it can be a death trap for investors.
Until proven otherwise, I still see this present up move as nothing more than a bear market rally.