By Nicholas Santiago on May 6th, 2010 3:48pm Eastern Time
The stock market rally from March 2009 has been nothing less than spectacular. However, while every talking head in the media is cheering the stock market this resembles the same type of action in 1930. Back then the stock market rallied 50 percent from the 1929 stock market crash and then sold off to new lows into 1932. This action today may not be exactly the same as 1930; however, there are many similarities.
Since December 2008 the United States central bank called the Federal Reserve Bank has kept the fed funds rate (overnight lending rate to the large major banks) at zero percent. Honestly, we have been saying for quite sometime now that if things in the economy were all back to normal why would they have this key lending rate at zero percent? The answer is that they needed to keep the markets inflated. By the Federal Reserve Bank adding this massive liquidity to the system the markets have rallied and the major bank stocks have all soared higher. In reality all of the banks have been bailed out along with countless of companies.
This is not how capitalism is supposed to work. Believe it or not failure is how capitalism is supposed to work. Capitalism rewards survival of the fittest. Since the 2008 stock market crash it has been government bailouts and taxpayers that have been on the hook for all this corporate greed on Wall Street.
What does the Fed do now? The Federal Reserve Bank can always do different things to help stimulate the economy. However, the Fed funds rate is their main tool. Fed Chairman Ben Bernanke has been very creative since 2008. He has surprised the bears countless amounts of times including cutting the discount rate an hour before the stock market opened on an options expiration Friday. However, if the stock market falls when the Fed funds rate is still at zero percent this is a serious problem. This is truly a worst case scenario and the Fed's worst nightmare.
Nicholas Santiago
Chief Market Startegist
www.InTheMoneyStocks.com
To get more in-depth analysis, along with exact entries/exits, swing trades, and scalp trades, join our Research Center or Intra Day Stock Chat NOW and join the ranks of the Pros!
Comments