Prediction: The Fed Will Cut Rates

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"...a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here or call 888.484.8220 ext. 1.

FOX BUSINESS CHANNEL... OCT 15TH

Before I get into the market action, here is my take on the economy and the Fed.

I believe many areas of the economy are already in recession and unlike many economists who are predicting 2.5% GDP growth this quarter and next, I believe the economy will be close to flatline if not worse. I say this because of my unofficial Kaltbaum indicator. In the past couple of weeks, I visited and have spoken with a couple of dozen sales reps at a few big retailers...business is bad. I spoke to a dozen contractors...business is as bad as 1990. I spoke with several executives at housing companies...UGH! I spoke with a dozen auto dealers...guess what...you are going to see a lot of zero percent deals soon. The list goes on and on. I am seeing housing prices come down markedly across the nation. I am seeing credit card delinquencies...the consumer's last bastion...skyrocket. I am seeing foreclosures skyrocket. I believe we are now going to see all this affect employment. Expect job creation to stall.

You know I am not a cassandra...but the business cycle is the business cycle. Economies do have down time...and for sure, we have been way overdue. The end of the world is not at hand. Just expect slower growth. Whether or not a recesssion comes, beats the heck out of me. There is a vast wasteland of people who have called for recessions and depressions that never came to pass.

The FED...There should be no doubt that the FED will cut Fed Funds at their Spetember 18th meeting...but I expect not a quarter point...but a half point. But that is not the real story. I EXPECT THE FED TO CUT RATES AND THEN CUT RATES AND THEN CUT RATES DOWN TO 4%. After all, the 10 year is yielding 4.5. It is quite normal for Fed Funds to be a half point below Fed Funds. The wild card in all of this will be the dollar. The dollar index is sitting on a ledge right here...on major league long-term support. I am not sure it would be a good thing if the dollar breaks below it. The Fed, in my humble opinion may be walking a tightrope.

As far as the market, the NASDAQ experienced a suspect follow through day on Wednesday. Volume was heavier than the day before but only a smidge higher...and overall, volume was light. The last follow through...which occurred a few Monday's ago, failed miserably in 3 days leading to a mini-meltdown. Remember, every bull move has been preceded by a follow through day...but not every follow through day has led to a new bull move. I cast a suspicious eye at this one because 7 out of 10 stocks are in poor technical shape but will honor it by looking for sound high volume breakouts of leading growth stocks. Currently, it is slim pickings...so the market has some proving to do. Already, it feels like we are back to the trading before the market was squashed...where OILS and COMMODITY names lead...a select few growth names get a ton of money flows...FINANCIALS continue to puke...HOUSING continues its give-up phase...and most stocks do not participate. Just remember, the A/D topped weeks before the market did and in the NASDAQ case, amazingly, it was just at an ALL-TIME LOW...indicative of the continued concentration of money in big-cap NASDAQ stocks.

I also want to make note of the following statistic...an eye-opener!

Since the beginning of the 2006, here are the cumulative S&P 500 returns by days of the week:

Monday 1.40%

Tuesday -0.36%

Wednesday 18.72%

Thursday 4.36%

Friday -0.61%

I expect the market to continue to throw ridiculous curveballs. Just look at Tuesday and Wednesday...so take your time. The possible good news is that the FED is MOST DEFINITELY on the side of the markets right now and will not let up. I am headed out for some whitewater rafting for the Labor Day holiday. Enjoy your holiday as well.

Gary Kaltbaum