US Markets: Counting the Chickens Before They Hatch

This from CBSMarketwatch, ``U.S. stocks climbed for a second day Wednesday, with the Dow scoring its largest percentage leap so far this year, and a revived financial sector paving the way after a Federal Reserve official bolstered hopes for additional interest-rate cuts ahead.” (highlight ours)

This from New York Times, ``Stocks soared on Wall Street today after a top Federal Reserve official appeared to open the door for additional interest rate cuts, pledging to follow “flexible and pragmatic policy making” as the central bank decides how to cope with the current financial upheaval.” (highlight ours)

So aside from being oversold, obviously the US markets has been building its “bullish” foundations from expectations of further Fed Steroids or as they say "counting chickens before they hatch", this from Fed Governor Donald Kohn (emphasis ours)…

`` An important issue now is whether concerns about losses on mortgages and some other instruments are inducing much greater restraint and thus constricting the flow of credit to a broad range of borrowers by more than seemed in train a month or two ago. In general, nonfinancial businesses have been in very good financial condition; outside of variable-rate mortgages, households are meeting their obligations with, to date, only a little increase in delinquency rates, which generally remain at low levels. Consequently, we might expect a moderate adjustment in the availability of credit to these key spending sectors. However, the increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October. Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses. Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses a well.”

…while ignoring hawkish comments from Philadelphia Federal Reserve Bank President Charles Plosser and Chicago Fed President Charles Evans or a case of "selective perception".

This only means that the FED has its hands tied, where it would need to appropriately respond to market’s expectations on December 11^th else risks a collapse. A confirmation from Bernanke’s speech tonight could add to these expectations.

Remember, two rate cuts of 75 basis points and a bunch of policy palliatives have recently failed to boost the markets, hence yesterday’s dovish statements from Governor Kohn. This could simply be a clearing rally from technically oversold levels and is no guarantee that markets would resume their uptrend over the interim.