Are We Looking at a Bottom?

By Bryan Perry

The first day of trading in the second quarter of 2008 was the best one-day performance for the markets in 73 years. If it's a harbinger of what the quarter could bring, then we might have seen the retest of the lows for the major averages in March and a successful double-bottom formation that will hold. That means the recent pop for the stock market could be the start of the market building on itself -- albeit, not without more high-level, back-and-forth volatility.

From where I stand, it's hugely encouraging that the market didn't sell off in a violent way after Fed Chairman Ben Bernanke said it's possible that the domestic economy is in a recession in the first half of 2008. It tells me that the current recessionary pressures are, for the most part, already discounted or priced into the market. That would explain why we're seeing a shift in sentiment to a point where the pattern has become buying the dips rather than selling the rallies.

One thing I did glean from Bernanke's comments (and from the rhetoric of some other Fed governors) is that we can expect the Fed Funds rate and the Discount rate to be lowered more on April 30, at the next Federal Open Market Committee meeting. The stock market is already responding positively to this expectation, and that's why we are seeing a bullish tone starting to take over.

In an election year, the Fed always tries to get all of the heavy lifting done early in the year, so as to not appear to be influencing any outcome in November. That said, I expect the Fed to lower the Fed Funds rate by a quarter-point to 2% and then call it a day.

From that point on, much of the stimulus from prior rate cuts, the massive injections of capital into the monetary system and the poor excuse of a stimulus package passed by Congress should all start to have an effect.

Yup, even the much-beleaguered S&P 500 Home Builders ETF (XHB) broke above its key 200-day moving average, signaling a buy. The real question to be answered is: Do you dare?

Investors were so shaken by the meltdown in the residential housing and credit markets that it just doesn't seem possible that housing-related issues could trade higher. But that's exactly what is occurring. Shares of Freddie Mac (FRE) and Fannie Mae (FNM) have rallied as much as 75% off their recent lows, thanks to having the wind of the government bailout at their backs.

In my view, the Fed-aided sale of Bear Stearns (BSC) to JPMorgan Chase (JPM) was a significant move -- call it "the" capitulation event that stuck a fork in the bear market.

Going forward, the ability to generate capital gains will be much more achievable than at any time in the past six months. It's been really tough sledding for all of us, but I'm beginning to believe that we are climbing out of the trough, and that better days lie ahead for the market.

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