*Extra* Daily Interview: Examining the Fed Rate Cut

Paul Cherney, the chief market analyst for Standard & Poor's, talked to Daily Interview today about the surprise 50 basis-point rate cut by the Fed. Cherney says he feels the slowdown in revenues and earnings by tech companies was the catalyst for the Fed's move, and that it'll be tech stocks that lead us out of the downturn. Moreover, he says that the market reached a bottom two weeks ago when selling pressure reached its heights. For more, read on.

Paul Cherney Chief Market Analyst Standard & Poor's

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TSC: What do you think prompted the rate cut?

Cherney: I think the Fed's concerned about all of the retrenchment that's taking place in the tech companies. They are worried about all of the people who are no longer working. That's a main factor, I would say. And plus, if they are supposed to be so vigilant about inflation, we don't have any, so they won't be chastised for reacting to the market. And the market put in some sort of a bottom two weeks ago.

TSC: What happened then?

Cherney: April 4 was the day when the Nasdaq had its lowest close of the past 2 1/2 years. There were several factors that came in on that day, one of which was worries about earnings going forward and that there were some signs that massive strength in the economy that might prevent the Fed from making a move.

But there was one other part of the recipe that I always like to see to help define a bottom, and that was what I call an "exogenous headline." It can be market-related, such as a currency or a venture capital issue, but it's often good when it's not market-related, such as a political crisis, and that was the case two weeks ago with the U.S. spy plane situation. I remember writing about it in my end-of-day that day, saying, maybe this is the exogenous headline.

Investor frustration reaches such a level for the people who have continued to hold on, that you get a day like that when they are bombarded not only with the mechanics of the marketplace -- in other words, the fundamentals of earnings or the lack of earnings visibility -- and the fact that so many companies continue to report under the already lowered earnings expectations.

On top of that, you get hit over the head with fears of some sort of an international crisis with China. That gets a lot of the fence sitters off the fence and they jump into the sell side.

If you go back and look at the volume on that particular day, it was pretty good volume, and it was capitulation volume, by my measures. The next day we went up on no news at all.

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TSC: How good is this for the markets?

Cherney: Oh, it's very good. Surprise rate cuts? The Fed doesn't like to do them. They think that it diminishes the impact to the markets. So, for them to have done this again, it shows that they stand ready, willing and able to ensure that this economy will not decline into a recession.

I'm very excited because I didn't get long into the market until we broke about 1,785 on the Nasdaq.

TSC: Could you comment on what's going on with the earnings releases this week? Intel(INTC Quote), Cisco(CSCO Quote) and Texas Instruments(TXN Quote) all met lowered earnings estimates, but they warned of inventory overhang, layoffs and sales declines in the coming quarters. Yet, ahead of the rate cut, these stocks were already moving up. Are investors looking past the bad news?

Cherney: We saw that yesterday with Cisco. If the shortfalls had been released back in November or December, investors would have panicked and the entire Nasdaq would have sold off to the tune of 7% or 8% in the day.

We set our lows yesterday in the first six minutes. The bulls were just standing there with their arms outstretched, palms up, waiting to catch everything opening near or at its lows. The bulls were standing right there saying, "That's good enough for me. I'll take that. That's a gimme."

An awful lot of people who wanted to sell have already sold, so that reduces the resistance above the market because there are fewer people waiting for prices to come up and then unload into it. When you go into a protracted decline, that is caused by people who are selling and the more sellers you get out of the way, the less there are to impede an advance.

It was more than obvious yesterday that the market has become immune to reacting to negative news in a blanket way.

TSC: You've said that you expect tech stocks to lead a rally. Why?

Cherney: They've been beaten up the most, and they are highly visible in terms of what market participants play. And they represent the future to a certain extent. Steel plants are steel plants and pharmaceuticals are pharmaceuticals. But it's the technology companies that come up with all of the innovations that move our lives forward.

I did a study two years ago on the sectors that led into a top, and out of the bottom. Roughly about 70% of them coming off of the bottom were the biggest leaders going into the top. That's why I say tech has to be in there. Don't expect the Nasdaq to hit 5,000, but they will offer the biggest returns on the rebound.