SPX: I'm not a fundamentalist, but I have pondered what might cause the SPX to loose 150 to 350 points in the next week or three. I think the most likely event would be that the Fed throws a party and nobody shows up. That is, confidence is lost in Bernanke's ability to save the world.
When the Fed fails to deliver, the markets let it know immediately. The 25 bp cut on October 31 was followed by a 100 point sell-off in the SPX in just 8 trading days. The 25bp cut on December 11 was followed by a 70 point sell-off in 5 trading days.
The Fed did get a 40 point pop in the SPX on 9/18/07 with its 50bp interest rate cut, and a 70 point surge on 1/22 following the 75bp cut. Then there was Tuesday's 40 point run after the Fed swapped $200 Billion in Treasuries for unmarketable junk. And even more recently, today's joint venture with JP Morgan to keep Bear Stearns afloat. But even after all that, there are still lots of fingers hovering over the panic buttons, and we are very close to making a new 19 month low.
I have attributed the Fed's repeated intervention for extending the current nominal 4.5Y cycle to 5 years. In support of this, consider the following: If the Fed had done nothing since August 07, is there any doubt that we would already have seen 1150 or lower in the SPX by the end of the January or earlier?
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