Watch For Possible Inter-Meeting Rate Cut Tomorrow...

With Fed Funds futures continuing to price in 100% probability of 75bp cut by March 18th, we are now in the red zone for a possible inter-meeting move.  Tomorrow looks like it might be the day as both S&P 500 and DJIA are at or near possible double bottoms on the charts.  Fed may seek to restore a bit of confidence in the market technically by moving tomorrow morning ahead of the open or intraday to reverse any marked sell-off in order to defend the January lows.  However, as outlined in our Feb. 29th blog I am looking for any rally to be short-lived and would take any bounce as an opportunity to add to short positions as a morning rally will likely fade by the close, and an intraday move will likely be a one-day wonder.  As such, we continue to hold our Feb. 26th short position from DOW 12,700 as technicals continue to deteriorate and commodities continue to push higher adding to inflation fears.  Moreover, our Oil long position taken on Feb. 10th continues to work precisely as expected with our $107-110 target being hit today.  We continue to hold the position as funds from across the globe continue to accumulate finding it necessary to be heavily long the commodity as an inflation hedge.  Note that we are approaching the end of Q1 here so the commodity move is getting a bit of "gas" (pun intended) with funds doing some expected window dressing adding to Oil and Commodity positions.  In addition, look for continued weakness in tech and financials as funds unload these Q1 losers from their portfolios.  I also expect mutual fund redemptions to intensify over the next few weeks as mom and pop throw in the towel on equities all together.  This will put additional pressure on tech specifically as fund managers liquidate their largest 2007 overweight position (tech) to raise cash.  

Moreover, on a bit of a doom and gloom note (I know that I've been rather doom and gloomish as of late but this sentiment has indeed been valid observing market action) the negative news flow not only continues to present itself within the banking sector but it has begun to intensify. Just today Fitch put out a warning that US Banks' home equity loans are worsening fast and there continue to be murmurs of additional write-downs and credit downgrades with regard to the major banks. We are also beginning to hear louder rumblings that commercial real estate may be the next sector to fall which would wreak additional havoc in terms of write-downs on an already worsening situation. Furthermore, Bernanke and a host of very notable speculators (Wilbur Ross today) are now convinced that a number of banks will indeed fail this year. What I'm getting at is, with confidence in the entire banking system now in question, is it possible that the foundations of the stock market will come into question shortly thereafter? I mean what exactly are we holding here? Pieces of paper that say we own a share of some company? Where's my money exactly? I mean if people begin to lose faith in the institutions that supposedly house and provide direct access to our own cold-hard cash and savings, what makes you think that in a state of panic people won't begin to question the soundness of brokerage firms and mutual funds and this entire risky thing we call the stock market? Is it that far fetched? I don't think so.