Bears were trapped at Tuesday’s close, victims of last week’s hawkish announcement from the Fed. Ordinarily, expectations that the fed funds rate may be about to rise by 25 or perhaps even 50 basis points would not be cause for celebration. This time, however, Wall Street seems emboldened by its ability to take the Fed’s best punch without buckling. The initial price gyrations on the most recent Fed kabuki gave way to a short squeeze rally that has added 411 points to the Dow in the last four days. The surge would need to tack on another 230 points, surpassing the 17934 peak labeled in the chart (see inset), to hint of serious buying power. But at this point we shouldn’t bet too heavily against it.
Yellen & Co. must be thrilled to see stocks ratcheting higher, even if there is nothing of substance to support the move. It will provide the cover they need to give administered rates the upward shove banksters seem to want. No question, a little more steepness in the yield curve would be a step toward financial normalcy. However, given the risk that even a small turn of the screw could puncture the banking system’s quadrillion dollar derivatives bubble, the banksters and Wall Street should be careful what they wish for.