SpencerBarron.com

  I’m putting on my armchair economist’s hat today.   I’m still amazed that people would get excited enough to buy stocks just because the Federal Reserve announces a rate cut but it happens more times than nought.   You would think that a savvy investor would buy a particular stock based off of expected growth of the asset or the strength of the company’s financial statements.  What happens when you toss the homework aspect of a purchase aside?  

I think the Wall Street adage is, “Bulls make money, Bears make money, Pigs get slaughtered.”

In my opinion there are only three actions a smart trader would take:  

1. Absolutely nothing.  No reason to buy or sell right then.  Plenty of reasons to wait for the volatility to decrease.  Double check your facts and assumptions based off the new information and revisit the stock later.
2. Short term day trade.  Very Very Short term.  A little risky but to some a drastic, yet predictable, price move could mean a pretty penny.  
3. A move to safer ground seeing that the Fed has reaffirmed that yes, things are slightly less rosy than when they made their emergency rate cut.  Thus, when you see your position spike for no good reason, you’d sell and get into something else…or maybe take your position down and wait until tomorrow.

Now, I’m not a economist or even a stock market analyst, so don’t get too worked up if you understand this much better than I do.  I know this is an oversimplification, but my understanding is that rate cuts are applied when the economy is slowing down.  So when the seven economist types that sit on the Federal Reserve Board of Directors get together, and six of them vote to cut rates by a half a point,  my take away on that would be some concern that there could be some problems in the short term with the economy.  Problems with the economy usually doesn’t bode well for most stocks.  At least until the stocks account for the expectations in the stock price.  So when I see a rally like I saw at 2 P.M today, I try to think about what the people were actually thinking.  The truth is, the people that were buying weren’t really thinking. 

Those that were buying, for the most part, were buying based off emotion.  That’s pretty dangerous when you’re making a purchase.  Whether it’s a stock or a new home, it’s a safe bet that you should only make the purchase if you really understand what’s going on.  What is the asset worth?  Do I need to buy it now?  What’s the advantage of buying right now?  If I wait, do I miss an opportunity or will I pick it up next week cheaper?  Do your homework.   For the stocks today, the simple explanation of it is that everyone expected that there was going to be a 50 basis point cut today.  They’ve expected it for weeks.   It’s been so expected that it’s already priced into the stocks.  So when the Dow Jones Industrial average goes up 226 points without any real basis for it, and especially since the underlying factors actually suggest some negativity in the underlying assets, the smart money that already owned the stock would probably sell,  right?