Traders Come to Their Senses

All three major indices (Dow Jones, Nasdaq, S&P) ended down nearly a full percentage point today as traders finally realized that the Fed will not be cutting rates any time soon.

I've been saying since the last hike nearly a year ago that a cut is not imminent and that the risk for a further hike still exists. Stubborn inflation indicators including increased unit labor costs will continue to influence Fed action for the foreseeable future. Strong resource utilization (low unemployment) is probably the most important factor driving inflation at the present time, but persistently high energy costs should not be ignored.

Morgan Stanley issued a "triple sell" recommendation for European stocks citing their analysis that European markets are as much as 14% overvalued. Traders fear that U.S. equities may be similarly overpriced.

It is satisfying to know I've been right all along. If only I knew how to profit from that, I wouldn't have to work.

This is a healthy correction, but I believe that the Dow could easily drop another 1000 points in the coming months as bond yields continue to rise reflecting the reality of a hawkish rate regime.