Nothing lasts forever. Judging by the plunging stock market of yesterday afternoon and today, the axiomatic trading strategy of "Don't fight the Fed" is going to join "buy the dip" in the ash bin of history. Unloading stocks at any price, in effect fighting the Fed's efforts to support the market, has paid off like a busted ATM of late and is working again this morning as stocks threaten to slip through support in the mid-1,100's on the S&P500.
For those who've been on vacation, feel free to click on link to read what the Fed announced yesterday. Done? Traders ignored the stuff about Operation Twist and focused on "significant downside risk, including strains in global financial markets." "Significant" was new in a bad way, as was referring to global markets. If Bernanke were a CEO, yesterday's release would have been a huge earnings miss, lowered guidance, and a lack of ideas on how to improve the business. Basically, the Fed has become Research in Motion (RIMM). As soon as the Street digested the release they got a sick feeling and started selling off stocks. The nausea shows no signs of abating just yet.
To help us explore the point and efficacy of Op Twist and whether or not the Fed has any other better ideas, Breakout welcomed former Vice Chairman of the Board of Governors of the Federal Reserve Alan Blinder. If flattening the yield curve to encourage risk seems a little, well, tepid to you then you have good company in Blinder. Twist "should have a marginal, not revolutionary effect on economic behavior," he says.
Blinder doesn't think the Fed is totally out of ammo, they just don't have much left in the way of high impact weaponry. "Once you run out of bazookas you shoot the machine gun. When you run out of machine guns, you shoot the rifle. You run out of rifles, the pea shooter, the bb-gun, whatever you've got," Blinder says. If the difference in going to war with a bb-gun or being totally unarmed seems negligible to you, you're obviously not alone.Read More »from Bernanke Will Never Give Up: Alan Blinder