Here's our psychology or the FOMC minutes released today at 2.00 PM ET: The Fed's sentiment is getting worse. Some members foresee a "severe" economic slump, with economic activity to "shrink" in the first half of 2008. They mentioned that "calibrating" policy was difficult in the face of inflation and a weak dollar.
Our team interpreted the FOMC minutes as a negative for the stock market, and a positive for bonds.
They stress "uncertainty", and uncertainty is the worst word for stock investors. They also mentioned housing prices declining more steeply than expected. Even though it’s MOTS (more of the same), the Fed is standing still, like a deer caught in head lights. That's not good for bulls and remember it's "Trend Setting Tuesday", so today's close may well be the theme for the week.
Our readers would be wise to stick with an asset allocation suited for a very volatile market with a downward bias. We reiterate once more that you have 50% in stocks (long and short), 30% in the iShares Lehman ‘TIP’s, and 20% in Cash. Please remember to use every tool at your disposal. Never rely on one methodology, always obey the 11 Commandments, and listen to the Conference Call. Our Alcoa CC analysis was posted just yesterday and you can find it by scrolling down.
Thanks for reading the Psychology of the Call.