Tuesday, September 18, 2007


Markets make their big moves when a black swan shows up. Not when everyone is waiting with baited breath for an FOMC announcement. Today's announcement, whether a .25% move or a .50% move, will not be as big an event as is anticipated by many. The history of the last recession serves to tell part of the story. The FOMC cut rates and the market continued to struggle.

The long history is that the S&P is up an average of 12% 6 months after the first rate cut and up 19% within the first year. These averages hide a lot of stuff. One is that after the turn, certain sectors did much better than 19% during the next year and a lot of other sectors struggled. The other thing hidden is the take off point. The history is that the market begins to go up about a month before the first rate cut and that has already happened. As I recall, the market bottom was on August 16th. The market is anticipating a lot of volatility, which means option spreads have widened. Thus, high returns can be "locked-in" with various collar type strategies. These strategies are for those with super sized accounts and with automated computer driven trading platforms. The point for the small investor is to not get caught up in the short term.

In case you do not know the story of the black swan, a couple of hundred years or so ago, it was decided by scholars that although other white birds had black cousins and although there is the occasional black sheep, the black swan does not exist. They said it could not be proven but one had never been seen and one did not exist.