Trader’s Narrative

The Federal Reserve made a bold move and lowered rates effectively to zero. Here’s the full statement:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

It took a few years but finally they’ve moved in front of the bond market. As I’ve been saying for more than a year, the Fed allowed the bond market to get way ahead of it and then started to play a game of catch up where they would lower only to see the 90 day Treasury bill rate slip lower still.

To put it bluntly, the Fed is punishing saving and rewarding spending and debt. With inflation running at ~1% anyone who saves money is a chump. Many money market funds now have a negative return (due to MERs).

Anyone who goes in debt to the gills wins. Isn’t that how we got into this mess? you might ask. Well, who said common sense had anything to do with monetary policy.

Believe it or not, the US now has a lower interest rate than Japan. And the lowest rate since records have been kept.

After Japan, the lowest rate is claimed by Switzerland after the Swiss national bank cut their benchmark rate to 0.5% last week. Then Canada at 1.5%. Follow the link to see more global central bank rates.

With the impending FOMC decision, traders are going to be twitchy and nervous. Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.

If you’ve been reading the blog for the past few weeks, you’re no stranger to my repeated bullish commentary. The market seems to have bottomed right on time with the Nasdaq composite sitting +150 points higher now.

So lets see what the last week brought us in terms of sentiment data:

AAII Sentiment Survey
With the market powering ahead last week with back to back up days, sentiment has shifted. The AAII respondents are neck and neck with 41% bullish and 40% bearish.

Put Call Ratio
The options sentiment ratio spiked up to almost 1.0 in mid November as people rushed to buy puts. But now the equity put call ratio has fallen by almost half. This isn’t automatically a negative as the market has recovered and forced people to back down from their gloom & doom forecasts.

Nasdaq to NYSE Volume Ratio
Although I haven’t said much (or anything really) about this sentiment gauge, it is one of the oldest ones around. The theory is that the two exchanges represent different kinds of equity - Nasdaq was once the platform for unproven, young, and therefore, riskier listings and the big board, the place where all companies wanted to graduate to, the place where the largest, most stable corporations called home.

Of course, over time the difference between the two exchanges has been pretty much eliminated. But this indicator is still going on strong. So by following the ratio of volume on the two exchanges, we can gauge the level at which investors seek risk.

A spike lower in the ratio means that investors are fleeing Nasdaq stocks for NYSE ones and a spike up, the reverse. The most recent market decline in mid November saw this ratio dip to 1.20 - not the lowest it has been, but still very close to the 1.0 level which is the “uncle” point.

More importantly, with the exception of the spike low in November, the ratio has been scraping the ceiling. We’d have to go back more than 6 years to find similarly high readings.