Bernanke Blinks… and Now a Bounce?

Faced with plunging markets in Europe and Asia Monday (the NYSE was thankfully closed in observance of the Martin Luther King holiday), helicopter-Ben finally blinked.

The Fed moved unusually between meetings to slash the Fed funds and discount rate by 75 basis points (0.75%) to 3.5% -- reducing the Fed’s benchmark interest rate to the lowest level since 2005. The magic elixir seemed to work (for the moment at least) as the Dow Jones Industrial Average, down as much as 464 points early yesterday morning, bounced back to close down just 128 points, or 1%.

European markets, which were falling steeply for a second straight day, reversed course and closed higher on the Fed's action Tuesday. The rally followed through in Asia early today as markets across the region enjoyed a significant rally, with Hong Kong up 8%. This morning, Wall Street opened lower just the same.

So will Bernanke’s blink finally led to an oversold bounce? I have been expecting a significant retracement of the heavy selling we’ve seen in recent weeks – and the bounce may soon arrive – if so, enjoy it while it lasts.

As the Wall Street Journal said this morning, “The central bank's moves may be too late to stop the U.S. from entering recession, as many economists now forecast, but it may make one milder and shorter.

However, the Journal goes on to point out that “by acting so explicitly in response to market developments -- just a week before a scheduled meeting to decide on rates -- the Fed is running a risk. Investors may view the steps as panicky, undermining the goal of the rate cuts.”

So the Fed moves from “behind the curve” to “panic rate-cut mode” all in one fell swoop.

My expectations for oversold global markets remain the same. I expect a healthy, near-term bounce followed by at least a retest of the recent lows, if not even lower prices ahead. Too much damage has been done to global investor confidence for the Fed’s surprise rate cut to significantly shift market sentiment overnight. As I have pointed out before, a bear market environment such as we are now in, places a very big premium on investment selectivity.

Rather than making “fearless forecasts” (or is it foolish forecasts) of the likely magnitude of the bounce; it’s best on this first rally attempt to make like the school bus driver when approaching a rail-road crossing… Stop, Look, and Listen… to what the markets are saying about the character and strength of the coming “bounce.” Only then should you act accordingly.