Inflation or Recession?

Something to ponder… How bad do they (the Fed) view the economic climate and how much risk of an economic downturn does the Fed must fear for them to take action that apparently sacrifices concerns about inflation? What are the implications? What if the Dow does not respond to this dramatic action and can’t recover yesterday’s losses? Or even worse, begins to build upon yesterday’s losses in the Dow?

Today's announcement by the Fed to inject liquidity was seen as inflationary and impacted futures markets accordingly. However, after an early near 300 point surge in the Dow, the stock market fell back to just 50-100 point gain during the noon hour. If the stock market fails to quickly recover yesterday’s losses and more confidently embrace the Fed’s latest move, traders will begin to express concerns the financial conditions that have warranted dramatic steps by the Fed may be much worse than what investors have feared.

There is a growing level of panic in the trade…it doesn’t matter whether you are long, short or on the sidelines…just a general uncertainty of how to cope. Traders/investors don't like such environments and can quickly become uncomfortable with previously confident positions. If the stock market falters after today’s Fed move, the excitement about inflation could quickly transform into fears about a severe economic recession. We are at an important crossroads for the financial community—pay attention to the turning signals.

Given the right amount of investor nervousness, the end-of-the-year factors could cause some severe profit-taking initiatives to escalate rapidly if the wrong type of "turns" are seen. Everyone beware.