A Different Kind of Rate Cut

August 6, 2008
By seadmin

On Tuesday, the Federal Reserve’s Open Market Committee acted as everyone expected and left interest rates unchanged. No surprise from the Fed here, but what did come as a surprise, I suspect, was a different kind of rate cut helping to calm this market.

This different kind of rate cut isn’t generated in the offices of the Treasury Department. This rate cut comes straight out of the energy pits, and manifests itself in the form of substantially lower oil prices.

The chart below shows just how steep the decline in crude oil prices has been during the past several weeks. The price of light crude now is $121 a barrel, well off the high of $147 reached in the first week of July.

The decline in crude prices, as well as a decline in gasoline prices, has temporarily lifted the heavy cost burden that has plagued consumers throughout most of this summer. What this decline in oil prices amounts to, in essence, is an interest rate cut that goes directly into the pockets of every American.

Given the decline in oil prices, along with some positive developments in the financial sector, it’s no wonder we’ve seen a big rally in the equity markets. On Tuesday, the Dow surged more than 300 points, proving that there still are some bulls out there lurking around Wall Street.

During the past several weeks, the S&P 500 index has made a run higher, and now is almost back above its 50-day moving average (blue line), as seen in the chart below.

But before we get too excited, keep in mind that this rally has taken place during a bear market. Often, bear-market rallies are quite strong. Unfortunately, strong bear-market rallies often are followed by even stronger moves to the downside once the exuberance fades.

In my opinion, the market environment right now can only be described as a trader’s market.

So, how do you take advantage of a trader’s market? Well, the simplest answer is to trade. By trade I mean you can’t get too comfortable with any long position in your portfolio. You also can’t be complacent with any of your short market positions.

I know many of you want to be active traders right now, but I also know that many of you need help with this potentially profitable, yet challenging proposition. If you want to learn how to actively trade in this market using exchange-traded funds (ETFs), then my ETF Trader advisory service is for you.

To find out more about how to trade in this trader’s market with ETFs, click here.

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