Stock Market: Test of Correction Lows

We continue to believe that the equity market has seen its lows. Throughout the month of August and during September (through today) the market (DJIA) has traded in the narrow 13,000-13,500 range. The intra-day correction low of 12,500 was hit in mid-August, and has not been challenged since. The low close remains above 12,800. There have been several tests of this low: in each instance, support has held.

While we cannot rule out a test of the 12,500 area, we are inclined to doubt that this will occur. There has been a significant change in the MACRO-CLIMATE affecting stock prices.

The change: DE FACTO FED CAPITULATION. While we have not yet had a formal surrender, we doubt that the FED will be able to evade the inevitable much longer. The TONE and SUBSTANCE of public pronunciamentos from various FED "policymakers" has changed decisively. Even the anti-inflation diehards among them now acknowledge publicly that the risk of recession has risen appreciably. No FED "policymaker" who wishes to hang onto his job without risk could oppose a FED FUNDS cut in light of the recent dramatic change in FEDSPEAK.

We believe that thanks are in order to Professor Martin Feldstein, who got the ball rolling with his realistic assessment of serious recession risk at the recent FED clambake at Jackson Hole. Dr. Feldstein, we would note, did not rely on computer models or reams of statistics but rather seemed to base his assessment on COMMON SENSE, a quality notable for its ABSENCE at the FED.

Sophisticated investors have duly taken note. With a flood of liquidity a'comin and stock valuations attractive, why fight the inevitable?