Ready To Smash The Record
Drudge Report May 10, 2006
The Dow pressed toward its all-time closing high although investors anxiously awaited the Federal Reserve's next move on interest rates when policymakers meet Wednesday. Many on Wall Street are hoping the Fed will signal that an end to its rate tightening is near.
Analysts say the Dow is poised to break its record and could push higher. Ken Tower, chief market strategist for Schwab's CyberTrader, said investors appeared increasingly optimistic about the market, especially after stocks held onto their sharp gains from the end of last week.
"People became much more bullish on Friday morning, and the fact they didn't sober up over the weekend is a very positive sign for the market," Tower said. "Of course, everything depends on the Fed."
Associated Press, May 9, 2006
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What's Wrong With the 'Next To Last' Rate Hike
By: Pete Kendall, May 10, 2006 |
The correct timing sequence is that a stock market top of some consequence is due prior to the Fed’s last rate hike.
The Elliott Wave Financial Forecast, April 2006 |
As Joe Granville used to say, "When it comes to markets, what's obvious is obviously wrong." Nothing inside the financial establishment is more accepted than the bullish implications of the Fed's current interest rate policy. With the buzz surrounding the today’s Federal Reserve board meeting reaching epic levels, subscribers should double back to the commentary that accompanied this chart in the April issue.
The Dow Jones Industrial Average’s all time high of 11,750 may well fall as the headline from today’s Drudge Report expects, but the mounting anticipation of the bulls – which has now reached the point of presupposing a new record high in the Dow – is actually solid confirmation of our April forecast. The consensus is that this is probably the next to last rate hike with one more likely by August. With the financial crowd buoyantly anticipating "the word from on high" this afternoon, EWFF’s contrary take on “the end of the rate hike” euphoria is right on track. Another long-term interest rate chart in Monday’s Short-term Update confirms that this particular rate hike, to a Discount Rate of 6%, is in line with several of the most important junctures in stock market history. Subscribers will get a good look at this chart when the next issue of EWFF comes out on June 1.
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Additional References
April 2006, EWFF
Does the end of a series of rising rates provide a tailwind for equities, as so many people claim? Back in July 2004 EWFF published a chart showing that the fed raises rates only after short-term market rates and the stock market start to rise. In other words, the actions of the Federal Reserve lag freely-traded markets. The opposite holds true, too. The Fed stops raising rates after the market is finished going up. The relationship is shown beautifully in this chart from Ned Davis Research (www.ndr.com), except that we have added the labeling for a classic impulse pattern. The graph portrays the average DJIA price action in the months after the completion of the 16 previous Fed rate-tightening cycles since 1920. The average mean return 6 months later is -4.9%, while the average mean return 12 months later is -3.87%, contradicting the current bullish consensus. Also of interest is the average date of the Dow’s top relative to the fed’s final rate hike; it occurs about two months prior to the end of the fed tightening cycle, corroborating our thesis that the market leads and the fed follows. This timing makes sense because the fed raises rates when it is confident about the economy. As EWP explains, “wave 2” psychology is the final point of optimism in the wave structure. Some project the end of the rate tightening cycle to be in May or June. Regardless, the correct timing sequence is that a stock market top of some consequence is due prior to the fed’s last rate hike, which means anytime now. |
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