To Fight or Not to Fight the Fed?

Beginning in August the Fed has altered its stance towards the economy. First, they changed the wording and then, most probable on the 3rd of November, they will proceed to more quantitative easing. Meanwhile, the stock market has registered bear market readings on the May-June sell off that are consistent with the end of the 09-10 bull. Can the Fed resuscitate by its actions the dying bull? As a longer term trader, to fight or not to fight the Fed this autumn, as this rally becomes overbought?

For a possible answer I looked in the past, at a similar case. I will also highlight the differences to nowadays at the end.

In August 2007 the markets were coming after a sell off induced by bad news related to subprime mortgages and a slowing economy (purple ellipse below):

The inflation was also moderating (purple ellipse):

Consequently, in August, after one regular and two unscheduled meetings, the Fed signaled a change of stance: they started to worry more about economic growth than inflation. Usually, this means rate cuts, which happened in September and end-October. The markets started to rally:

Also, what is interesting is that on the August 07 sell off the market registered bear market readings, in the same fashion it did this summer. What happened to the market after the end of October meeting is history. It seems that fighting the Fed was the way to go in 2007.

The similarities to today are multiple. First, the economy and inflation slowed down (red ellipses in the first two charts). This, coupled with bad news regarding sovereign debt, has taken the market down. In August the Fed changed its stance, showed it meant business in September and at the beginning of November is ready to go further and act. Second, the market entered technically in a bear market and has rallied since the Fed changed gears. Here is the chart:

What to do? The answer is pretty clear given the analogy. The November '10 meeting corresponds to the October '07 meeting and it is the last thread the bull is hanging on. If the bear is here to stay longer, the market should really change its behavior after this meeting.

Can it be different this time? It can, because the expansion cycle is still young compared to 2007. It is much easier to resuscitate a young patient than an old one. I am still ready to bet on the downside but will listen to the market especially after the 3rd of November.