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Fed cuts rates 25 basis points to 1.75%

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The Federal Reserve announced it has lowered the Fed funds rate by 25-basis points to 1.75%. Today's decision breaks a 40-year low of 2% on the federal funds rate. The Fed said its decision to cut just 25-basis points is based on the belief that "Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels." The Fed also said, "Weakness is demand shows signs of abating, but those signs are preliminary and tentative."

To me, this sounds like "cautious optimism" about the future of the economy, almost as if the Fed is taking a day-by-day approach to things. Monitoring each piece of economic data and putting the "economic puzzle" together.

Broader market averages in the green

Since today's Fed announcement, the broader market stock averages have remained in positive territory. The widely followed Dow Industrials (INDU) are trading up 61 points, but just under the psychological 10,000 level of near-term resistance at 9,987.

The S&P 500 Index (SPX.X)

The S&P 500 (a broader market average) is trading in positive territory after today's announcement on interest rates. With longer-term trend broken to the upside and short-term upward trend violated just yesterday to the downside, hopefully subscribers see how important bond YIELD may come into things in the next week or so.

I think the "key level" of support for the SPX is the 1,100 level with the now turning higher 50-day moving average at 1,110 as a good moving average to be monitoring. The longer-term 200-day moving average remains the key point of contention at $1,173. Notice how this longer-term moving average and DECLINING trend acted as resistance last week at 1,175.

You can really get the feeling the "ferocity" of the recent move higher just by comparing the shorter-term trends on the chart. This spring, the short-term trend was more gradual, while current short-term trend is steeper. This is almost the exact same type of action that we've seen in the longer-term bond YIELDS. Their monitoring going forward is a necessity.

Today, the 30-year YIELD dipped to a low YIELD of 5.486%, but by sessions end finished at the 5.546% level. This is encouraging for equity bulls as the intra-day reversal back to the close at a session high YIELD indicates to me that some bond market participants feel the Fed is most likely nearing the end of its cutting cycle. Today's reversal back higher in YIELD came right at the longer-term 200-day moving average at 5.486%.

Jeff Bailey
Senior Market Technician
Option Investor

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