Planet Yelnick

The House Wins

The bets are in, and over the past month neither the bull nor bear views won.  The house won - a trading range, commissions to brokers. Prechter still expects the big one to start soon; Neely still expects a bullish breakout.  Tony is convinced this is a bull with nested 1-2 counts, about to spring up in a bullish 3; and Dow Predator is circling his vctims, seeing the big down move.  Most likely nothing gets resolved until after Labor Day, and even then the first week is a short one.   What then may happen is ominously described in John Mauldin's current newsletter: the NAHB Housing Index has an 80% correlation to the S&P with a 12 month lag.  That index has plummeted, and is still falling.  The correlation says the S&P would fall to below 600.  Check out the attached chart.  Then place your bets. 
The House [Index} may win again. 

The Fed is "All In"

Recent market action substantiates what Prechter has often said - the Fed does not drive events but reacts to them.  The lack of a rate increase was a non-event, as perhaps a 1/4 point raise would also have been.  The models analysts use to recommend portfolios in stocks vs other investments use longer term rates (2 year to 10 year) to assess equities relative to a risk free rate.  Those rates have hovered at 5% for quite a while even as the Fed has raised from bargain-basement to normal short-term rates.  The Greenspan Conundrum continues.  Analysts are looking beyond the Fed to the underlying trends of inflation vs recession (earnings drop), and markets are hovering on the edge of chaos until a consensus emerges one way or another.  The Fed is betting on a soft landing.  Will the Fed win its bet?   

Place Your Bets!

A lot seems to ride on the Fed tomorrow.  Currently the bet is 80% that the Fed won't raise.  This morning on CNBC Gary Shilling predicted the Fed would not raise, and come December when a recession looms, will begin to lower rates.   In contrast, John Mauldin acknowledges the odds but thinks the Fed will raise.   Mitch at BrainFood points to the 830a announcement of productivity as giving the market an indication of what the Fed will do, as Bernanke has stated that he will gauge the inflationary threat by how inflation compares to productivity gains.  Even if the Fed does not raise, it might issue a statement of such ambiguity it opens the possibility of a raise in September, after more reports come in; but if so, it puts itself in a difficult box - recession or inflation - by delaying required action now.  Is all of this what the market is watching?  Let's take a look.