The McClellan Market Report - Special Alert

  Sept. 29 (McClellan Financial Publications) -- With the stock market trying to have a new version of Black Monday, we figured that it was time for another of our very rare special alerts. We last did one on July 26, 2007. The vote in Congress appears to have failed to pass a rejiggered version of the Paulson bailout plan, or whatever name one wants to call it. The stock market was already down strongly ahead of that vote, and the defeat of that bill has pushed the major indices down even further. The natural worry is that the financial markets are going to collapse, and to lead the economy down the drain in the swirling vortex of panic.

  For the managed accounts program that we advise, we are closing out of our short positions as of today (Rydex Inverse SP500) because this looks like we are at the point where the worst is being seen. As we write this, the NYSE has more than 40 to 1 down volume versus up volume. We also have a bottom due Sep. 29-30 according to our Timing Model signals.

  Eventually, this is going to turn into a great short term buying opportunity. The reason we say that has to do with the Fed’s efforts to throw money at the banking system, independent of the Treasury Department’s plan to seek to buy up troubled mortgage debt. Last week, the NY Fed’s Domestic Trading Desk started injecting extra reserves into the overnight auction of Fed Funds, which is the deposits that member banks loan each other overnight to help maintain their reserve requirements.

  The FOMC sets the target rate for Fed Funds, and right now that target is 2.00%. That means the NY Fed’s Domestic Trading desk is supposed to try to hit that target rate, by adding or subtracting reserves as needed. Going into the stock market bottom on Sep. 17, the Domestic Trading Desk was falling down on the job, as so many banks were coming to that auction seeking reserves that the effective rate got all the way up to 2.80%. The Fed officials appear to have finally woken up, and are added reserves like mad. You can see this in the chart on page 1 where the positive bars mean that the Target FF rate is now well above the effective rate. Friday, Sep. 26, saw an effective FF rate of 1.08%.

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