Out of nowhere the Fed announced a surprise rate cut of 50 basis points. Just this morning traders were saying that there was only a 40% chance that the Fed would cut rates at its May 15th meeting, so much for that theory. Since Greenspan doesn't have a history of inter-meeting cuts, the announcement caught everybody off guard. What makes the news even more odd was the Fed's belief that we were not in a recession, and only in an "inventory correction." Accordingly, markets have exploded. The Dow is up 411 points, and testing the 200-day moving average that wasn't even on the radar screen a week ago. The Nasdaq Composite has shattered the 2000 level, up 9.42%. The Semiconductor Index is up 16%.
Dow Industrials Chart - last eleven months
Just after the Fed cut rates, the Dow Industrials exploded to the upside. A daily interval chart of the INDU shows that this index rallied right up to the 200-DAY MA near 10,615. This morning we felt that the 10,300 level might be a point of contention, but I don't think anyone thought the Fed would step in and cut rates. Bears are in BIG trouble here and this should have even the angriest of bears thinking about now closing many positions. This type of thinking will now give us some confidence to buy pullbacks in the future. What I'm also watching here though is that bonds are now seeing buying. This has me thinking that short-term, there will probably be some profit taking in stocks and some slight asset allocation by institutions from stocks to bonds over the short-term. Institutions love risk management and there are some that have big gains in stocks short-term. I'm now making note of today's activity and it will give me greater confidence to buy a pullback.