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You can say it was a case of Fed hangover. In what has become an odd yet peculiar pattern in the financial markets, the US stock market rushed ahead following the Federal Reserve announcement and then sells off the following day. Thursday’s selloff was particularly strong as everyone had a night to reassess the statement and economic data released as well. On one hand we had the initial 3rd quarter GDP estimate which came in above estimates at 3.9% with the PCE coming in at a respectable 1.8%. Exports were up at an annualized rate of 16.2% while imports rose by 5.2%. The weak spot was the residential construction component once again, which fell by a 20.1% annualized rate. On the other hand, we had a Federal Reserve who decided to cut rates and issue a neutral statement in an attempt to assist homeowners who will be refinancing subprime and Alt-A loans next year. Chicago PMI fell to 49.7 from 54.2 in a surprise to the markets. New orders (53.9 from 56.2), production (46.9 from 58.3), and employment (49.5 from 52) all fell. Some of the fallout can be attributed to the automakers that went pushed production into previous months before negotiations on the new contract started. The biggest shock, however, came from the prices paid index which surged to 74.9 from 59. Any selloff should be short and brief as I do not expect a long drawn out pullback as of yet. The deteriorating market fundamentals indicated that a pullback was going to happen soon but the large drops in Wall Street are worrisome as is the divergence between the NASDAQ and Industrials. This is beginning to look a lot like the 1997-98 timeframe. As a side note, there are those that are knocking Goldman Sachs’s note on taking oil profits stating that they are pushing the market down. But an astute trader would realize that OPEC added capacity officially on November 1 and that the oil price is trading out of line with historical trends. In addition, capacity has come back on line in Mexico and a new field is about to come online in the Gulf so the supply issues we were having in the US should disappear shortly. This will give the market the opportunity to breathe easier as we enter the winter months
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