The Fed Chairman Puts Down a Concrete Floor for the Market

SAN FRANCISCO -- Stealing it back from The Grinch, Alan Greenspan just saved Christmas. By acknowledging the risks inherent in a slowing U.S. economy, the Federal Reserve chairman sought to assure that consumers will keep their wallets open. What transpires at the mall this month remains to be seen, but investors on Wall Street were more than ready and willing to accommodate the chairman -- at least for one day.

The Dow Jones Industrial Average jumped 3.2% today, while the S&P 500 gained 3.9%. Even more impressive, the Nasdaq Composite Index soared 274.05 points, or 10.5%, its biggest-ever point and percentage gain.

In New York Stock Exchange trading, advancers bested decliners by a 5-to-2 ratio and new 52-week highs beat new lows 167 to 89. In over-the-counter activity, gainers led by nearly 7 to 3, although new lows outpaced highs by 235 to 65. Trading volume of 1.4 billion shares on the Big Board and 2.4 billion in Nasdaq activity further evinced the session's power.

"This was a relief rally in the truest sense of the word," said Greg Nie, chief technical analyst at First Union Securities, reflecting not only on Greenspeak, but the growing likelihood the election morass will soon be dredged and made safe for tract housing by the judicial corps of engineers. "But it's too optimistic to say we're putting in a V-bottom. The underpinnings are iffy [regarding] sustainability."

Nie, guilty of picking the bottom before it was ripe in early October, said the "biggest plus" today was that the Dow both climbed above its 200-day moving average of 10,682 and moved further away from 9800, thus avoiding a break of its upward trend line going back to 1994.

How Now Ol' Dow?

But the S&P 500 and Nasdaq Comp remain well below their 200-day moving averages of 1438 and 3815, respectively, the technician noted. The history of the Comp's three previous plunges more than 20% below its 200-day moving average (it's still 24% below) suggests "a process of two months of basing and then two to three more of subsequent recovery" before the index will resume a clearly bullish trend, he said.

Scraping the Nasdaq off the Floor

Notions of concern were few and far between today. More common was a sense that "Alan Greenspan just put a cement floor under this market," as Scott Bleier, chief investment strategist at Prime Charter, said.

Wall Street participants were encouraged largely by this comment in Greenspan's speech before the America's Community Bankers conference:

[I]n an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending.

A 1.7% decline in crude futures prices to below $30 a barrel (natural gas futures dipped 0.7% after yesterday's 11.4% ascent) helped traders mainly overlook Greenspan's warning that the "sharp rise in energy prices, if sustained, is worrisome" because the economy "is obviously at increased risk of untoward events" as it goes through a "transition from unsustainable to more modest rates of growth." (That phrase was also music to traders' ears.)

Finally, Greenspan took pains to refute any comparison between the current situation and the fall of 1998, as TheStreet.com's Elizabeth Roy Stanton duly noted.

The chairman has cleared the way for the Fed to adopt a more accommodative bias at its Dec. 19 meeting, and an actual ease early in 2001. But anyone expecting a series of rate cuts, as occurred in 1998, likely will be disappointed.

Hobgoblins of Consistency, Part 3

I have been critical of Greenspan, even going so far as to label him turkey of the year for helping facilitate the "cult of Greenspan" and what I (among others) perceive as an accompanying moral hazard. What occurred today only reinforced that outlook. Hard to argue the "irrational exuberance" has been eradicated after this monstrous rally in the major averages, as well as by a host of midtier tech names such as Inktomi (INKT Quote - Cramer on INKT - Stock Picks), Transmeta (TMTA Quote - Cramer on TMTA - Stock Picks), and Blue Martini Software (BLUE Quote - Cramer on BLUE - Stock Picks); each rose more than 50% (!) today.

But philosophical issues are separate from market reality. The old saw "Don't Fight the Fed" has proven truer than ever in the past year, both on the down and upsides. Intellectually, I'm curious to see how nonbulls such as Don Hays will respond to this latest turn of events. Still, it'd be foolish and foolhardy to say: "The Fed is becoming more accommodative, but stocks won't rally."

Having previously underestimated the power of both speculative excess and the public's appetite to own stocks (which aren't always mutually exclusive), I don't intend to make the same mistake again.

Thus, it gives me great pleasure to offer yet another reason why you should be bullish: The Nov. 28 Commitment of Traders report from the Commodity Futures Trading Commission showed the net short position by commercial hedgers on the S&P 500 futures contract had risen to 81,194 contracts, the latest in a series of record high levels of shorting by the hedgers. Conversely, the net long position of small traders (aka retail investors) had climbed to 70,473 contracts, also the latest in a series of new highs.

Yesterday, one hedge fund source who's been largely short this year quipped: "Who do you think is more likely to be right," the professional hedgers (aka "the smart money") or the retail speculators?

The source, who shall remain nameless, also observed that "how big the next rally will be is a function of hedgies' covering." Judging by the size of the hedgers' current short position (still growing by last count), "the eventual rally should be mind-boggling," he declared.

The next Commitment of Traders report won't be out for another 10 days or so, so we don't know for sure -- but it's highly unlikely the hedging community has yet made a big dent in its huge short position.

P.S.

As an aside, the term "commercial hedgers" traditionally refers to companies that take positions in commodities markets to lock in prices for raw materials needed for their products, according to Barron's Dictionary of Finance and Investment Terms. In the case of S&P 500 futures, natural hedgers means financial institutions, including the trading arms of Wall Street firms whose strategists have been repeatedly telling clients to buy stocks...