	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 04-May-05
Stock market swings wildly following a quirky Fed error

Web Log - May, 2005

Stock market swings wildly following a quirky Fed error

The Fed raised interest rates a quarter point yesterday, triggering an investor buy/sell frenzy as the overnight funds rate increased to 3.0%. Early last year, the rate was 1.0%.

Dow ups and downs on May 3, 2005 (Source: WSJ)

Dow ups and downs on May 3, 2005 (Source: WSJ)

The increase, announced at 2:15 pm, was expected, but it triggered first a 10 point increase and then a 40 point fall, all within a couple of minutes, as investors noticed that the wording of the Fed statement appeared to indicate that the Fed was getting increasingly concerned about inflation.

Then investors reversed themselves, and pushed the Dow up 90 points, and then back down 100 points, where it appeared to settle for the rest of the day.

But then at 3:50 pm, just 10 minutes before the end of the trading day, the Fed announced an error: They had accidentally omitted the line "longer-term inflation expectations remain well contained" from their statement.

In the those last ten minutes, the Dow jumped up 40 points, to end the day relatively unchanged.

Stock market volatility in April, 2005 (Source: WSJ)

Stock market volatility in April, 2005 (Source: WSJ)

Today's wild ride continues an extreme level of volatility that occurred throughout April. As the adjoining graph shows, the Dow had a 100 point change (up or down) seven times in April, an extremely rare event.

As I explained last week and the week before, this kind of volatility occurs before a major stock market correction or a major crash, although that doesn't mean that a stock market crash must occur in the next few weeks.

The reason is that the volatility means that individual investors are not making decisions based on individual stocks, which they do in normal times; instead, they're nervously making buy/sell decisions based on their "feeling" about where the entire stock market in going. With investors moving in unison, that means that the entire market is subject to volatility that only a single stock would have in normal times, and it means that a scare can cause a panic and a stock market crash.

VIX volatility index, 1997 to present (Source: Barrons)

VIX volatility index, 1997 to present (Source: Barrons)

The VIX is the "Volatility Index," computed by the Chicago Board Options Exchange (CBOE).

The adjoining graph shows that the VIX is the highest it's been in years, and that previous highs have always accompanied financial crises.

From the point of view of Generational Dynamics, we're headed into a major 1930s style Great Depression, and in 2002 I predicted the Dow would crash to the 3000-4000 range by the 2007 time frame. Today, with the American economy continually deteriorating, I have no reason to revise that forecast. The current volatility might mean that the slide will begin in the next few weeks; or it could signal only a minor correction for now, leaving the major correction for a later date. (04-May-05) Permanent Link
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Generational Dynamics Web Log for 04-May-05 Stock market swings wildly following a quirky Fed error

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Generational Dynamics Web Log for 04-May-05
Stock market swings wildly following a quirky Fed error