Seller Beware (Five Tumbles and a Jump)

I spent the afternoon collecting some interesting historical data which regards multiple Fed rate cuts, largely from Norman Fosback's Stock Market Logic, originally published in 1976*

TWO TUMBLES AND A JUMP:

Fosback's Two Tumbles and a Jump rule states that when the Federal Reserve eases the monetary climate by decreasing one of three basic policy variables (Discount Rate, Margin Requirement, or Reserve Requirement) two times in succession, conditions are favorable for an ensuing "jump" in stock prices. Prior to today's 75+75 basis point cut, the Fed had already reduced the Discount Rate (cost for banks to borrow directly from the Fed), from 6.25 percent to 4.75 percent since August. That rate now stands at 4%.

Historic Successive Discount Rate Cut Results:

Signal	Date	SP500 Max %	SP500 Max %
		Gain 1-Yr-later	Loss 1-Yr-later

1	Dec 23, 1914	+ 82%	0%
2	June 16, 1921	+ 41%	- 6%
3	June 12, 1924	+ 42%	0%
4	Nov 15, 1929	+ 28%	- 23%
5	June 24, 1932	+ 137%	- 4%
6	May 26, 1933	+ 31%	- 8%
7	Sep 14, 1942	+ 48%	0%
8	Mar 30, 1949	+ 16%	-11%
9	Apr 16, 1954	+ 36%	- 1%
10	Jan 24, 1958	+ 34%	- 3%
11	Aug 12, 1960	+ 20%	- 7%
12	July 10, 1962	+ 24%	- 6%
13	Dec 4, 1970	+ 17%	0%
14	Dec 6, 1971	+ 22%	0%
15	Jan 9, 1975	+ 34%	- 1%
16	June 12, 1980	+ 22%	- 1%
17	Dec 3, 1981	+ 31%	- 3%
18	Nov 22, 1983	+ 96%	- 11%
19	Oct 29, 1989	+ 39%	- 16%
20	Dec 19, 1995	+ 150%	- 2%
21	Jan 31, 2001	0%	-39%
22	Sep 18, 2007	?	min max loss will be -14%
		37% median	- 7% median

	Oct 31, 2007	3rd cut Discount Rate
	Dec 11, 2007	4th cut Discount Rate
	Jan 22, 2008	5th cut Discount Rate

This is but one indicator. I'm not ignoring that and I don't like to fight the tape, but I certainly don't want to fight the Fed with results like that. Today was the 5th Discount Rate cut and counting, since August. We should see higher prices beginning now, or sooner rather than later if not immediately.

A further look at the data reveals a little less certainty of a rise close to the cut-date and a progressively higher probability of a rise in prices 3 months out, 6 months out, 9 months out, 12 months out, and 18 months out. This is influenced, naturally, by the historic tendency of the market to rise over time, but these numbers are well above any mean norms.

* My Fosback data re Two Stumbles and a Jump runs from the period between 1914-1981. With the help of Hans Wagner and The Market Oracle, I was able to bring the data up to September 18, 2007