Relief Rally? Don’t Bet On It

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.

That kind of instability is a good sign that the market is at, or near, the
bottom. But being close to the bottom doesn’t necessarily mean a bounce-back
is in the cards for the near future.

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

At least I hope not.

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