Most everyone thought that the outcome of this week's Fed meeting would be inconsequential thinking that the Fed would leave well enough alone. Then, there was talk that they were figuring out how to reword the language of their accommodative policy statement without disturbing markets too much. Seems the phraseologists should keep their day jobs! The Fed goes from "considerable period" to "patient," and the market goes into convulsions. In prior missives last year, I predicted that the market would go into convulsions once the Fed began raising rates, looks like we have just seen a dress rehearsal.

Since Wednesday's action was dramatic, everyone is no doubt mouthing off an opinion about it, so I must as well. As bearish as I have been, I must say that the action smacked of panic and a rush to judgement that in general needs to be bought, not sold. The Fed dusts off its thesaurus and suddenly the economic recovery is over?!? I don't think so. As I have said before, interest rates are so low now that only the most rapid and dramatic increase in rates will bring the recovery to a halt. The bigger enemy of the recovery is sustainability, not higher rates. That is, so far, we have resuscitated the patient with massive amounts of drugs, cajoling, grooming, and other man-made stimulants. The patient has yet to prove that it can walk on its own once the life supports are shut down. That sustainability must now come from within, from improvements in efficiency, profitability, and quality. Are rates going to go even lower? Is the Fed going to get even easier? We better hope not because that would mean the economy is getting weaker, not stronger, and would you want to be holding stocks at THESE prices under THAT scenario? I didn't think so.

In fact, high valuations are the trapdoor for the current rally in the financial markets. Earnings are coming in very nicely to start the year and sometimes even better than expected. Many stocks have responded in kind. But when you look under the covers you realize that a lot of these same stocks are already quite expensive and have just gotten even more so. Let's not even mention the highly speculative names that have been running on hype, dreams, and other man-made machinations. The Fed change in policy (if you can really call it that) does add a smidgen of uncertainty to the markets and thus raises risk levels. Under such circumstances, you have to think at least twice before plunking your $$$ down on some fad of the week stock that is likely to collapse at any given time --- higher risk means that collapse will come sooner, rather than later. But in the rest of the market, that is the real companies that are now making money hand over fist, curing balance sheets, and hoarding cash, these kind of sell-offs must be bought. The increased risk is just that negligible.

Now, all this smooth-talking begs the question --- is there some other risk we are not thinking about? Perhaps people are fearing again that the corporate-friendly Bushies are not a foregone conclusion in 2004. That's possible. Perhaps people are finally getting uncomfortable with the valuations in the market. That's not likely since in a strong rally like this, high valuations only matter when you are looking for an excuse to sell (like Wednesday). I just can't call it. It truly is hard to comprehend that the world has become dramatically different in just the span of a few days. Even the bear case is no weaker or stronger now. And we already know that eventually the Fed will have to raise rates, or at least not be biased toward keeping them this low. Sure I think the music will stop at some point, I just cannot be convinced that the time is now. Certainly there are a lot of bears out there who will be quick to seize on this week's action as a sign of the end, or the beginning of the end…and just as certain as they are, they will act with certainty, and will get seized themselves as the fuel for the next (and do I daresay the last?) leg up! Regardless how things actually turn out, the action should be quite choppy and short-term traders are really going to have a hard time navigating the waters. It is going to take more conviction, more awareness of the fundamentals, and greater flexibility to get anything positive done.

Finally, on a technical note, I did notice on Monday that as the Dow made new 52-week (and multi-year) highs, the Dow Jones Transportation average failed to confirm the move. In fact, it actually LOST fractionally while to Dow powered to a 1.27% pop. For followers of Dow Theory, this action was a definite red flag. Moreover, Wednesday's sell-off was bad for the Dow since it was down in the triple digits, but the transportation average really got a hurting put onto it, dropping it hard to the 50-day moving average. This line has not been broken since June. The Dow did not confirm this move and never broke its own 50DMA and the transportation average obliged by quickly recovering. Once again, the Dow is "far" from confirming this latest break, but if it does, we just might have a whole new ball game on our hands…Stay tuned and be careful out there!