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The Fed Kills The Shorts

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by Yves Smith and Felix Salmon
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Aug 17 2007 12:00am EDT

The Fed Kills the Shorts?

Yves Smith of Naked Capitalism submits:

Given how extraordinary the Fed's half point (not mere quarter point) discount rate cut of this morning was, and how the markets had been clamoring for it, you'd think we'd see more of a bounce in the Dow than the mere 160 ish points it is up as of this writing (that has come to constitute mere daily noise).

Of course, a discount rate cut is not a Fed Funds cut, but perhaps most important was the information content of this move. Bernanke has signaled that he is the true heir of "Greenspan put" Al. And in keeping, the language in the Fed's statement shifted away from the threat of inflation, saying the risks to growth had risen "appreciably."

The underwhelming response in the stock market is surprising given that this is an options expiration day and traders bet heavily on the short side. Per Toro at Seeking Alpha, who wrote this before the rate cut:

So the question is do we buy here?

If you are a trader, I think the answer is "yes." I expect the market to rally, maybe hard, today and into next week. We are very oversold.

The technicals say we are. By almost every indicator I look at, we are at extreme levels. Also, as I understand it, today's options expiration is leaning heavily to the puts, which will force market participants to buy stock to cover.


Perhaps the rumors of high put levels were overdone, or perhaps we'll see a big move in the last hour of the trading day.

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