Ian Woodward's Investing Blog

The Grand Old Duke of York – a.k.a. Ben Bernanke

Duke of York

Last week I likened the Fed Chairman to the Grand Old Duke of York.  There is no question he saved the day a week ago last Friday and marched the Stock Market Indexes to the top of the hill.  I also warned that the market may get impatient that the Fed hasn’t done more, and after a week of a decent bounce from their lows, we trotted down the hill today on its way to test the low again. Three news items weighed down the market today: 

  1. Merrell Lynch (MER) downgraded three major United States banks, Citigroup (C), Lehman Brothers (LEH), and Bear Stearns (BSC) were all downgraded from buy to neutral, amid concerns over the institutions’ debt exposure.  The downgrade sent financial stocks rattling down, as it brought more pessimism to an already battered sector.
  2. The Consumer Confidence Index declined to 105.0 in August from a revised reading of 111.9 in July. Analysts had expected the index to fall to 104.5, so the drop was normal and expected.
  3. Then the Federal Reserve released the minutes of the FOMC meeting on Aug. 7th. The release renewed investors’ fears that the Fed will continue to place their emphasis on inflation risks and an interest rate decrease is less likely than previously thought. 

These are examples of a bigger problem that will plague the Stock Market for some time to come, and unless the Fed can pull another rabbit out of the hat, and particularly turn this last item around, it will be rough sledding for some time.  Their cloth is three weeks to the FOMC Meeting.   Now we must batten down the hatches and/or find short candidates while the storm continues to brew.  I have done my job in drawing the lines in the sand at the OK Corral, so I need say no more for now. 

So let the cards play out and we shall see where they fall, but the Bears have the upper hand right now.  Note how the Nasdaq finished right around 2500, and we now wait to see if it bounces or 2500 provides little resistance and the Index continues down. Whether it is a coincidence or not, the lesson learned is to always expect a retest of the lows when the S&P 500 has gone down >8% as it is most unlikely that it can recover with a V Bottom.   Best Regards, Ian.

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