Sunday, January 27, 2008

S&P 500 And Waiting On The Fed

Many feel the Federal Reserve is preparing another interest rate shot for the already interest rate addicted U.S.economy. There has been many references to the Federal Reserve controlling the punch bowl; the punch bowl reference has been way to kind. The Fed is the dealer of something more hazardous than spiked fruit punch, the effects of its miss-steps last longer and do more damage that a bad hangover. The U.S. economy is now addicted and fixated on interest rates and their direction. As our economy moved from being based on producing goods to one providing global services, it has also become very dependent on the price of credit. An accounting class 30 years ago the term "property plant and equipment" required for more study than that term today. The psychology of a service economy is far different from that of one based on producing physical goods. These services have a true value to the world economy, but tracking this value is not easy. There isn't a physical end product that can be counted or valued. Most of our country's end products are valued by an accounting entry, there is not a corresponding physical inventory.

Below is a chart of the 5year Treasury Yield showing rates from 1997 until now. How much of the price action in interest rates has been a result of pure supply and demand in the market vs the influence from the central bank? Low interest rates are great for spurring growth, but at how low do rates need to be for new businesses to flourish and our economy function efficiently? If inflation is 3%, what interest rate do you need to function efficiently in your day to day personal and business life?

5 Year Treasury Yield

The chart below is of the S&P 500 Index, it is marked with price target levels based on the 2008 opening range. With the Fed meeting this week, the market should be waiting for the announcement of how big the shot will be this time. If it is not enough, there could be some withdrawal symptoms. At the very least there should be a test of the recent low.

S&P 500 Index Daily (click to enlarge charts)

The chart below is a longer term monthly view of the S&P 500. In addition there is an indicator that shows the percentage of stocks above their 40 period moving averages. This is a helpful indicator in looking for confirmations and divergences at turning points in the market. It is also helpful to watch where the market is in relation to the 50% line. Being more aggressive above this line is usually rewarded, and not betting the farm when its below this level is important to keep in mind. Only losers add to losers.

S&P 500 Index Monthly (click to enlarge)

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