The major indexes suffered large declines last week, largely due to hawkish commentary by a number of Fed clones. Equities started the week in a negative fashion, after comments from Clone Leader Bernanke, that the Fed must remain vigilant in fighting inflation, put pressure on stocks. The weakness continued Tuesday and Wednesday, as more Fed officials made further hawkish comments. On Thursday, the key indexes were in a freefall in the early going, but staged a dramatic reversal to finish roughly flat. This brought out the bottom pickers on Friday, but those hopes seemed to be dashed when stocks continued lower. Very few sectors were spared from the carnage, as the declines were extremely broad-based in nature.

In hindsight (it’s always easier to see things that way!), it's pretty clear that the Fed wanted to gain the respect of the markets. One clone after another came out and spoke with a clear hawkish bias. Overall, this is the exact same Fed from Greenspan's last few years as Chairman. I highly doubt that their motive was to send stocks lower and significantly crimp the economy. My guess would be that the Fed was jawboning the market by talking tough in order to try to avoid their history of over-tightening. Commodity prices have pulled back significantly over the last month and wage inflation remains largely non-existent. Furthermore, with the economy clearly in deceleration mode, it's very likely that inflation will decline later this year.

As far as the equities markets go, at some point in the next few weeks I wouldn’t be surprised to see a selling crescendo-type low put in. While this could be a very solid buying opportunity to play a "summer rally", it's important to use patience and not lose a few fingers by trying to be a know-it-all hero. The tail end of a decline is often the most severe part, as the losses can make your head spin in those last few days. Since high quality names usually snap back first, it's probably a good idea to focus on some of the bluer-chip names for hints of some daylight.

Daily Pivot Points for 6-12-06

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.