January 31, 2008
The Fed Funds Rate has been used
as the basis for lending rates for quite a long time,
but the Target Rate has not been around nearly as long.
The Target Rate was introduced to the market in 1997.
The goal of the FOMC, at that time, was to tell the
Market in advance where it thinks Interest Rates should
be. We all know that Real Interest Rates are
rarely in par with The Target Fed Funds Rate, instead,
it is used as an indicator, and a starting point for
banks and other lending institutions.
 The
psychology of the Market has also been to buy stocks
when the FOMC cuts rates, and to sell them when the FOMC
is raising rates. The idea is lower rates help the
economy, and higher rates hurt it. There is a
major error in this logic, but sometimes Wall Street
Traders find it hard to see the Forest Despite the
Trees.
When the FOMC is cutting the
Target Rate they are doing it because the Economy is
weakening, and it needs support. When they raise
Interest Rates they do it to temper a strong economy.
Step back, forget the noise for a minute, and think
about it: do you want to buy stocks when the Economy is
weakening? Or do you want to buy stocks when the
Economy is getting stronger?
If you think it's smart to buy
stocks when the Economy is getting stronger, then you
also think it is logical to buy stocks when the FOMC is
increasing Interest Rates.
Do you think the same thing about
the downside? Let's look at historic comparisons
of the Target Rate between and the Dow since the
inception of the Target Rate:
Look at the correlation between
these two charts. Specifically, look at the
immediate change in Market Trend when the FOMC begins to
lower the Target Rate. When they did it in 2001,
the Market fell aggressively. Now, since they
began to cut rates in 2007, the market has done the same
thing. In between, when interest rates trend
higher the Market does too. Catching the bottom
may not be something that a change in the Target Rate
signals nearly as perfectly, but we have a way to do
that too. First...
Do you think you should be a buyer
when the FOMC is cutting Interest Rates? If so,
think again. Only fools rush in, and the
Institutions are lingering in the background, waiting to
bite. Can you see the Forest?
Steer clear of the Market until
the FOMC stops cutting rates. Then, and only then,
look to re-enter the market again. If you are
involved in the market at this time, have a strong short
bias, and a trading strategy. We can help you with
both of these.
We have also provided a strategic
plan to help you identify the next buy signal in
advance. You can review it on our website:
http://www.stocktradersdaily.com
Good Trading
Stock Traders Daily
http://www.stocktradersdaily.com
1.866.213.2067
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