Here is my best guess about what is moving the markets today. It isn't based on any inside information, only on my own poor ability to think things through. So, be warned.

As you may be aware, the Federal Reserve Board apparently took Y2K as a very credible and serious threat to the banking system. One of their greatest concerns was a lack of liquidity in Q4 of 1999, caused by risk-averse investors holding back their capital from the markets.

As a result, the Federal Reserve injected a huge flood of liquidity in the latter part of 1999. If I recall the numbers correctly, the M3 money supply grew by almost 16% during the months of September, October and November. That, my friends, is a massive injection of money in a short time frame.

One result of all this intervention by the Fed was that the professional investors realized that the Federal Reserve was absolutely committed to protecting them from downside risk in the latter half of 1999. The signals the Fed was sending were not subtle, but were writ large in screaming neon colors: put your cash into the markets and we'll make sure you make money.

As you may further recall, the conventional wisdom on Wall Street, as reported back before the most recent FOMC meeting was that, in spite of a GDP growing at 5.7% per annum and unemployment at 35-year lows, the Federal Reserve would not dare to raise interest rates so soon before the Y2K rollover. They were right. December was good times on the street, if you were deep into speculative plays!

Now comes the great irony. Y2K rollover appears to have gone very smoothly. The threat has visibly receded. But instead of a relief rally we may soon be getting a long-overdue correction.

That is because the investment professionals know a Y2K BITR means the Federal Reserve will soon be dismantling the policy that has shielded them from risk in late 1999. All that liquidity that has been flooding the system will be shut off. Some of it may even be sopped back up. Interest rates will be rising and there is no telling where it may end.

The fundamentals of the stock market have been very weak since 1997. The primary force holding the markets up has been Fed monetary policy. That easy-money policy has been artificially prolonged, first by the LTCM implosion, and then by the fear of Y2K. A Fed policy correction is coming and the investment professionals are scrambling to get out ahead of it and lock in profits in case the Fed takes the punch bowl away with a vengeance.

I don't expect a market meltdown in January. I do expect a correction. The rest depends on what the Fed says and does and whether the currency traders decide to move against the dollar.

Or, I could be wrong.

-- Brian McLaughlin (brianm@ims.com), January 04, 2000

Answers

You missed it? The relief rally was in December.

-- nobody (nobody@nowhere.com), January 04, 2000.

Curbs are in right now, Dow is down 255 points, NASDAQ down 155, S&P down 41 - this is more than a correction, investors are getting out will be getting is good.

-- yabadabadoo (yabadabadoo@yabadabadoooo.xcom), January 04, 2000.

Yep,It was in Dec.Now hoping for a 20% drop at least.Sittin' on a lot of cash!!!!

-- jj (jj@theshortside.b), January 04, 2000.

No, the curbs were adjusted again to 1100 points for the Dow I think. They vary depending on the timing, but it was always intended to be a percentage, not a point loss issue.

-- nothere nothere (notherethere@hotmail.com), January 04, 2000.

NYSE Announces First-Quarter 2000 Circuit-Breaker and Trading-Collar Levels

NEW YORK, Dec. 31, 1999 -- The New York Stock Exchange announced circuit-breaker and trading-collar trigger levels for first-quarter 2000, effective Monday, Jan. 3.

Circuit-breaker points represent the thresholds at which trading is halted market wide for single-day declines in the Dow Jones Industrial Average.

The 10, 20 and 30 percent decline levels, respectively, in the DJIA remain as follows:

7 A 1,100-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later.

7 A 2,250-point drop in the DJIA before 1 p.m. will halt trading for two hours; for one hour if between 1 p.m. and 2 p.m.; and for the remainder of the day if at 2 p.m. or later.

7 A 3,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs...

-- DeeEmBee (macbeth1@pacbell.net), January 04, 2000.

Brian:

Smells 100% correct (correction??) to me.

-- Dave (aaa@aaa.com), January 04, 2000.

Individual stocks (e.g., FreeMarkets today) will also be collared when they go into freefall (though not when they "rocket", of course).

The Street.com: Briefing Room

FreeMarkets Halted, Restarted and Getting Killed: It's Not Alone ( 1/4/00 2:17 PM ET)

Forget about the landing, the fall can kill you.

ll major indices were off more than 2% as inflationary fears swept the market, pushing everything lower. Much lower.

FreeMarkets (FMKT:Nasdaq - news) was the worst Nasdaq issue point-wise with a fall of 15%, before being halted at 12:55 p.m. and then restarted at 2:12 p.m. It last traded at 293, which is a loss of 49 7/8. The company announced that its agreement with General Motors (GM:NYSE - news) has been cancelled.

The Dow Jones Industrial Average was down 255 to 11,103. Only six of the 30 blue-chips were in the green. The rest were down, with financials off significantly. Eleven blue-chips added 10 points or more to the Dow loss. Five added more than 20 points.

American Express (AXP:NYSE - news) and Hewlett-Packard (HWP:NYSE - news) were the worst. Both lead two sectors that were having terrible days: financials and technology.

The Nasdaq Composite Index won't set any records today. At last check it was off more than 3.5%! Lately, the Comp was dropping lower and lower, freefalling into the afternoon, losing almost 100 points between 12 p.m. EST and 1:20 p.m.

TheStreet.com Internet Sector index was more hindrance than help. It lost 4.4%, as smaller swinging stocks swung low. Companies such as BroadVision (BVSN:Nasdaq - news), which are not considered bellwethers but have experienced great momentum over the last month, were the most susceptible. BroadVision dropped 9%. Other similar companies were Check Point Software Technologies (CHKP:Nasdaq - news), off 8%, and RSA Security (RSAS:Nasdaq - news), 13%.

The S&P 500 and Russell 2000 weren't spoiled and sure felt the rod. The S&P was beaten down 3%, while small caps also stumbled 3%.

You want to see big losers? Check out the oh-so-fashionable business-to-business sector.

E.piphany (EPNY:Nasdaq - news) dropped 19 7/8 to 182 5/8. Internet Capital Group (ICGE:Nasdaq - news), which was up 137% since Thanksgiving, dropped 15 1/16 to 185 1/2.

Market Internals

Do you remember Eric Stoltz in Mask? Internals make his character look like Christina Applegate circa '89.

New York Stock Exchange: 864 advancers, 2,224 decliners, 671 million shares. 21 new 52-week highs, 130 new lows.

Nasdaq Stock Market: 1,106 advancers, 3,016 decliners, 1 billion shares. 58 new highs, 109 new lows...

-- DeeEmBee (macbeth1@pacbell.net), January 04, 2000.