Relief Rally? Don't Bet On It
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The market isn't waiting to find out how much - not if - the Federal Reserve will raise interest rates. The Nasdaq soared in early trading Tuesday, as Internet stocks in particular posted strong gains through early afternoon.
It's a seemingly unusual reaction to the pending pain of an expected half-point increase in the Fed funds rate, and one which has led some ticker observers to conclude that the market already has factored in what should be the largest of six interest rate hikes in the past year.
Some even predict a "relief rally" in the wake of Fed Chairman Alan Greenspan's comments later Tuesday afternoon, especially given that flat consumer prices announced Tuesday morning should ease inflation fears.
Don't bet a whole lot on a rally, though, unless you count a one- or two-day run-up as a rally. We're still in the midst of a turbulent period that has seen Internet stocks careen from huge gains in one trading session to free-falling losses the next.
A lot of Internet companies - especially those that were wildly overvalued and now are cash-poor - simply aren't going to rebound. Rather, they'll disappear through acquisition or failure. While that's a healthy trend in the long-run, it will act as a drag on the market in the short-term.
I believe we're early into a much-needed sorting-out process, as investors seek to separate the Internet winners from the losers. Short-term catalysts such as action from the Fed or comments from prominent investment analysts aren't likely to make investors forget the lessons of this spring's correction.
At least I hope not.