The Fed and market view

Fed will make a rate cut decision again tomorrow. The most expected decision is a .25% cut. Not cutting rate this time? Very unlikely. By not cutting rate this time, any future rate cut will be interpreted as a desperate act by the Fed and will definitely cause panic in the market. The Fed does not want to put themselves into such a bad situation. However, it's very likely that, the Fed will give a hint to the market that, no further short term rate cut is in the horizon. Here is the possible effect on some of the sectors:

Commodity: Any signal of cease of rate cut will stablize the US $ which will be a bad news for the once high flying commodity sector. The over heated sector will have a severe correction. However, this should be treated as a great opportunity for those who missed out the last up leg. The commodity boom would not be over soon and people should take this chance to reposition themselves for the next leg up. Gold price will retreat further and possibly to low 800 range before building a support.

Financial: It's obvious that, people will take less rate cut as a sign that, the financial crisis has run its course and the worst is indeed over. Financial sector should perform well through the market correction and the next rally. However, by reviewing financial statements of some of the major banks, it's clear that, the fundamentals are very weak, leverage is way too high and most of the Fed injected fundings are used as reserve funds instead of lending to the public. The lack of service fees and new securitization products will definitely weaken both revenues and earnings of most of the banks, resulting in much worse financial reports in the next couple of quarters. It's unwise to think that, the financial crisis is over at this point. This sector has a long way to go before any regulatory enforcement being put into place. Any unexpected writedown from any one of the major financial organizations will have a domino effects on the rest of the industry and the effect will be exponential, not linear.

Technology: This sector will outperform the market since so far, it does not show any major impact from the financial crisis, at least not yet. Also, most of the major technology companies have much stronger balance sheets comparing with the tech bubble in 2000. However, if economic situation deteriotes, technology sector will eventually being impacted negatively.

The market internal is actually pretty weak right now. I would not be surprised to see the market rally a bit before correction takes place after the Fed meeting. However, I expect the market to have a mild correction which will be healthy for the next rally to assault the 200 MA again. Regardless if this is a bull trap or bear rally, the market has run way ahead of itself at this moment.

Such range bound and sudden rally condition of the market can last into summer. However, the lagging effect of the Fed rate cut will show no later than Fall and by then, if the economy deteriotes further, all hell breaks lose!