While this is not a "trading blog" per se we do cover some of the ins and outs of the short term moves in the market. The market's reaction to a trio of items yesterday injected some much need volatility and excitement into the markets. One market in particular we like to keep note of is the Fed fund futures market.

macroblog does the hard work of tracking the implied probability of various Fed fund rate outcomes. The chance of a rate rise at the June meeting to 5.25% fell precipitously, making the talk of "one and done" seem more likely.

Economist's View reviews the evidence and finds that absent any data surprises the Fed wants the markets to believe in the "one and done" scenario.

What is more interesting than the chance of additional Fed hikes is the historical record for the equity markets after the Fed has stopped raising rates. Barry Ritholtz notes the stock market does not do particularly well after the end of the rising rate cycle. In fact,

In 10 out of 14 occurrences, markets were appreciably lower 6 months later. 2 of the 4 periods where markets did not sell off — 1989 and 1995 — were smack in the middle of major secular Bullmarkets. In 3 of those 4 cases, the Fed had hiked only 4 times or less.

As Mark Twain was reputed to say, "History doesn't repeat — but it rhymes."

The question for those who like to study these historical precedents is simply this: Are we in a situation similar to 1980, where 6 months after the last of 14 hikes the SPX was 8% higher? Or, is another era more analogous — 1931, 1957 or even 2000?

Ticker Sense has a slightly different take on the same data. They measure the return on the stock market from the last Fed hike to the initial Fed reduction in rates. The results are the same with an average 7% fall in stock prices.

James Picerno at The Capital Spectator notes that while the Fed has begun to struggle with the ultimate risk of inflation, market participants have been embracing risk across the board. The indiscriminate rise in all asset classes this year has made the discipline of asset allocation seem downright quaint.

However prudent investors know that diversification is not valuable because we know what will happen, but is valuable because we do not know what the future holds. While the future seems quite bright right now, it is always prudent to carry the umbrella (of diversification) with you on a regular basis.