RealMoney Silver - Three Rate-Cut Scenarios for the NDX

Three Rate-Cut Scenarios for the NDX
By Chris Schumacher
RealMoney.com Contributor
9/17/2007 9:26 AM EDT

In my column last week, I noted expectations for the Nasdaq 100 (NDX) to remain locked somewhere around the NDX 2000 level between Friday and Tuesday, with an occasional dip back to the 1980 level.

Friday behaved perfectly by offering the gap down near 1980 that led to a 20-point reversal back to the NDX 2000 level. From that reversal off the morning lows, the index remained stuck along the 2000 level for the rest of the afternoon, ending the day at -- yes, you guessed it -- NDX 2000.

The debate on Monday will be the endless discussion regarding Tuesday's Fed decision. Expectations have not changed one bit with regard to whether the Fed cuts or not. Expectations are that it will. So rather than debate the "yes, they will" or "no, they won't," the discussion has centered around whether it will be 25 basis points (bps) or 50 bps. My outlook for the Nasdaq 100 will center around all three scenarios.

If the index stays stable between Monday and the Fed decision, and if no rate cut occurs, the markets will sell off hard. The market hates two things -- uncertainty and negative surprises. If the Fed decides that not cutting rates is the best posture for now, the market will take that as a negative surprise, and the selloff will be fast and furious.

However, I still feel this is the best alternative for the longer-term view of recession and inflation concerns. I'll take a sharp index selloff in favor of a better foundation to combat inflation and recessionary environments in 2008 and 2009.

If the index stays stable ahead of a 25 bps decision, we should see a quick pop as to the "thank you" approach, but then probably see strong volatility as the next debate becomes "Was it enough or not?" In my view, 25 bps doesn't resolve anything other than to give investors what they expect. There is too much debate about the 50 bps viewpoint to see 25 bps as something that resolves any uncertainty.

If the index remains stable ahead of a 50 bps cut, I would see this as the worst case. I would expect investors to view this as a "Why so much this early?" response. This would create uncertainty and a higher probability to see the markets sell off.

Furthermore, a move off this level this fast would make it all the more dramatic in the 2008-2009 scenario of higher inflation and recessionary concerns. If the Fed has to take back 50 bps and possibly tighten further, this would create a more difficult economic environment.

The above scenarios show why I feel building positions ahead of the Fed decision would be more of a gamble than a workable trading strategy. I will be trying to exist in the 1980-2000 range looking for a clue as to building a position over the next three trading days, depending on what the Fed deems to be the most appropriate course of action. A move under 1975 or over 2015 will most likely keep me on the sidelines for the next two trading sessions.