The Fed Got It 'Wrong'? Who Cares?

For those of you who don't recall the early 1990s, that was a time of crisis in the mortgage business as well. Of course, the mortgage business wasn't the size it is today, but it was a crisis all the same. And it wasn't that small.

Kidder Peabody was the big name in mortgage derivative trading back then. (If you're wondering who Kidder Peabody is, that probably just about says it all.) It was an old, established Wall Street firm, its inception dating back to the late 1800s. It was taken over by General Electric (GE - commentary - Cramer's Take) in the mid-1980s; after its eventual flop in the mortgage business (as well as some trading scandals), what was left of the firm was sold off to Prudential (PRU - commentary - Cramer's Take) in 1994.

(As a reminder to those of you who have forgotten that crisis in the market, and for those of you who were not around then, Orange County, Calif., was involved in the mortgage bond debacle as well. I can't recall if it actually went bankrupt or just came to the verge, but I admit I find it odd that no one seems to be discussing that mortgage bond crisis these days at all. Should we be paying closer attention to Florida?)

What I recall about that point in market time, though, was that I worked with a bond trader who lost a lot of money trading bonds around then. You see, Alan Greenspan's Fed hiked rates (hard to believe, but yes, they actually hiked rates, and did so by a lot!) in February 1994, and the bond market went into a tailspin. (I've circled that February hike on the chart of bond yields below). But this guy who worked on the next desk over kept insisting that the "Fed got it wrong."

Folks, look at this chart and note the persistence in the rise in interest rates after that Fed hike. Yet every single day in our morning meeting for months on end, even after the Fed hiked a second and a third time, this guy told us how the Fed got it wrong. I truly could not believe my ears.

10-Year T-Note Yield, Nov. 1993-Dec. 1994

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Source: BigCharts.com

I recall that because I remember thinking, "It wasn't the Fed that got the trade wrong -- you got the trade wrong." And that is exactly what I thought of this week as I saw whiner after whiner tell us how the Fed got it wrong.

The Fed got it wrong because it didn't "do" 50 basis points on Tuesday. Or the Fed got it wrong because it didn't lower the discount rate 50 basis points on Tuesday. Or the Fed got it wrong because its deal with the other central banks should have been announced differently, or at a different time. I'm sure there are plenty more excuses out there, but I think that sums up the general sentiment.

Whether the Fed does what you want it to when you want it to is not the issue. The issue is, were you positioned correctly? And if not, what are you doing to correct that? Blaming the Fed is not the answer.

The market was poised for a correction, and we probably would have sold off no matter what the Fed did. What we need to focus on now is what the number of stocks making new lows is doing. So far, it has been fairly well contained. It's only been two days, so that might not be a good test, but this is really where the big test for the market comes in.

NYSE New Lows w/SPX

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I've boxed off in red the initial decline the S&P had in mid-October. You can see how the number of stocks making new lows expanded pretty quickly then. So far, we haven't yet surpassed the number of new lows from last week. Yes, it's still early, but pay attention to this statistic since it tends to be an early warning sign.

That's good news so far. The bad news so far is that we still haven't heard anyone chattering about that head-and-shoulders top in the DJIA. Remember, the louder the chatter, the less it works. The quieter the chatter, the more it works.

Those are two of the things I would focus on in the days ahead, not whether the Fed did the right thing.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

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Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.