Bombs and Ben — The Market Reacts

It’s been a wild week in the financial markets since last Wednesday’s Alert. We witnessed renewed violence in the Middle East that sent stocks reeling; bringing a wave of fear to Wall Street that knocked the Dow down nearly 400 points in just three days.

But in the market, things have a way of turning around quickly, and that is exactly what’s happened today. The Dow was up 200 points midway through Wednesday’s session, and the chief reason for the rally was comments from Federal Reserve Chairman Ben Bernanke.

Big Ben told Congress that the economy seems to be moderating, and that inflation remains contained. Wall Street is interpreting Bernanke’s testimony as a sign that the Fed is really close to ending its streak of interest rate hikes. We’ve seen this reaction to a possible ceasing of rate hikes before, and we’ve also seen the disappointment that ensues when the Fed doesn’t act like Wall Street thinks it will.

We’ll have to wait a few more weeks to find out if the Fed will actually abstain from another interest rate hike. But in the meantime, I urge all of my Alert readers to not be overzealous by jumping headlong into stocks right now. As we’ve seen since early May, sellers are still firmly in control of the action. Until the market proves otherwise, my advice is to proceed with extreme caution.