Post Jackson Hole State Of The Markets

Forming opinions regarding the markets we are trading is something that I encourage, if those opinions are backed by a careful review of the facts. However, because at this particular time markets are so volitile and so sensitive to new information, trading our own opinion is far too difficult. It is essential at this time to have an accurate gauge of market opinion and trade along with it.

From where I sit, there is a deep divide among market participants and top level economists regarding the future direction of the U.S. economy. While I happen to have an extremely high opinion of the job that the fed has done, there are some that have come to a very different conclusion. Bernanke is guiding the federal reserve thru the first crisis of his tenure and there by no means is a definate indication that his course of action will prove to successful.

I'll leave it to you to read this article: http://bloomberg.com/apps/news?pid=20601087&sid=agrcjp4O4M6Y&refer=home but I want to make a point about it here:

Martin Feldman is a top economics professor at one of the world's leading schools. Many important Wall Street executives likely were his students at one time. He is also the head of one of the most important and respected economic think tanks. There's no question that market participants are taking what he says very seriously.

Other participants at the conference have expressed their own opinions about what the fed should be doing and these opinions for the most part do not seem to agree with the fed's present course of action. I have not read one opinion from any conference attendee stating that the fed's present course is likely to lead to a successful outcome. While there does seem to be a general sense that a cut in the overnight rate will occur at the next meeting, I haven't found any opinion stating that things will necessarily undergo a dramatic imporovement once the adjustment is made. Since Marin Feldman is talking about 100 basis points of reduction as being needed, 25 is going to be viewed as merely a first step. There's always the possibility that market participants will react to a 25 basis point reduction with panic, as it could indicate that the fed sees future economic developments as being far worse then they've let on to this point.

The current state of the market is likely to be wavering between uncertainty and outright pessimism. Until proven otherwise, it's likley that bad news will be greeted by a failry strong sell off, while good news is likely to be greeted with a fairly muted response and/or more of the price gyrations that we do not want to trade. We will need to remain very conservative when trading positive information and we may in fact be sitting these trades out until we see that some sustained optimism exists, with the key word being sustained.