Volatility Wins The Day...

FUNDAMENTAL ANALYSIS
The Dow ended lower today by 120.96 points on more volatility. With all these volatility talk so far, what exactly is volatility?? Why is everyone talking about volatility? Well, in laymen terms, volatility means that the market will either go up or down in huge, sudden moves which defies short term prediction. Under such market conditions, one needs to adopt a longer time scale. Right now, it seems like there are 2 tribes in the market right now; The Recessionist who thinks the US economy is near or is already in recession and bangs on the weaker dollar, subprime mess and crumbling consumer confidence; The Expansionist who thinks the US market is going to do well even though growth has slowed down. I am definitely an Expansionist who continue to believe in keeping America great. Just look at the bond yield curve right now (See daily yield curve here)! The curve is getting steeper by the days with the long term yields systematically declining! Just look at the Fed Fund Futures! Already pricing in a more than 25 basis point cut! Think America is missing out on the global growth and that the rest of the world is "decoupling"? Think again! Growth is simply a number! Anyone who started with zero would show surprisingly huge growth on the slightest, smallest improvement! Here's to draw an analogy: A company CEO hires a new worker. That worker's pay improved by $1200 a month from zero! Now, that's a huge "growth" for that worker and at the same time, did nothing for the CEO. However, at the end of the day, the CEO is the one who makes the big money when the company does well. That company is now Earth.

TECHNICAL ANALYSIS
More volatility indeed. There are 2 interesting things to take note of today. 1, the gains of 3 days ago continue to hold up and as long as the low of 13 Nov remains intact, we could see a short term run from here. 2, the total equity put call ratio (see daily put call ratio here) SURGED over 40% against yesterday! This is indicative of an excessive bearishness in the market and such excess bearishness usually leads to a short run rally. We saw the same pattern back in some of the key reversal periods previously too. Overall, I would agree that this is a very volatile and dangerous market but with a slight hint of bullishness already magnifesting.

Countdown To Fed... 1 Day!

Well, the day is upon us at last! The Feds will release their policy statement tomorrow afternoon after their 2 days meeting is over. Even though a 25bp cut in fed fund rate is what everyone's expecting, there are still plenty of reasons to suggest that the Feds might just hold rates steady! (that is why the fed fund futures are still not pricing in a more than 100% chance of a rate cut)The main reason of all would be the value of the dollar. When interest rates go down, the dollar value goes down too as a supply of new dollar floods the market, which could result in increased inflationary pressure. The dollar has already declined against major currencies in a big way and further decline could have complex consequences. Already, the commodities markets have edged higher across the board. In a nutshell, with a 25bp cut already priced in so far, there is really no telling how the market will react when the policy statement is released tomorrow. Will a rate cut spur a new rally? Not necessarily since much of it has already been priced in and there remains a number of heavy weight releases this week including the Employment report this Friday, which could still change things. Will not getting a rate cut spur a market decline? Very probable, especially since the market is reacting faster and faster to news and new information than ever before (Efficient Market?).

Today, the Consumer Confidence report turned in the worst reading in 2 years, bringing the Dow immediately to its intraday low. The Consumer Confidence report is not a historically important report due to the fact that it measures mainly consumer confidence towards the labor market. The labor market has been slow to react to changes in the economy so far, thus reducing the Consumer Confidence report's value as a leading indicator. However, it remains a good confirmation indicator of what is already known, or rather, already being suspected in the economy. What does a lower Consumer Confidence suggest about what the Fed is going to do? Nothing, as this is not an indicator Uncle Ben watches in his policy making.