A very peculiar rally

The official news is that stock market rally was triggered by the announcement by the Federal Reserve that it would effectively socialize the costs of the mortgage crisis by swapping Treasuries for AAA securities, very few of which  not meet investment grade standards, by the way.

But I am not sure that events bear out this simplistic interpretation.

It’s true that the Fed made the announcement early this morning (at 7AM Eastern, I think) and markets immediately surged. However, Japan and Hong Kong closed higher last night. Nikkei Net Interactive said the rebound [on the Nikkei], which many saw as driven mostly by short-covering, was weak” (emphasis added). The European markets show a spike upward near noon their time. That rally was gradual. The DAX (Germany) and FTSE (UK) spiked upward in early morning, then the rally decayed.

So, a worldwide rally was already well underway when the Fed acted. Perhaps news leaked, allowing financial institutions to profit ahead of the move, or the Fed chose the timing knowing that the shorts would be under maximal pressure. Or maybe they got lucky.

In any event, this was a very, very large rally– about 3.5%–  for the US market. And, because so many traders rely on technical indicators, it will probably feed on itself… for a while.

Nothing, however, has fundamentally changed. The Fed has given a few billion to the banks– not $200B, one must hasten to add, but a fraction of that. Nowhere near enough to solve the crisis.