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Fed keeps interest rates where they are

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The Federal Open Market Committee (FOMC) policymakers decided to keep its target for the federal funds rate unchanged at 1.75% sighting that weakness in demand is abating and economic activity looks to be firming.

Comments of caution were issued in regards to, "degrees of strength in business capital and household spending is still uncertain." Therefore, the FOMC continues to believe that, the committee's long-run goals of price stability and sustainable economic growth and the information currently available, have the risks still weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

Market reaction

There has been relatively little market reaction to today's FOMC announcement and many were expecting the Fed to keep rates where they were at. The response has been modestly bullish as some sectors are trying to build on gains.

Stocks have shown some modest bullishness with the Oil Service Index (OSX.X) now leading sector gainers with a 2.71% gain. We noted this group's sudden turn higher about 15-minutes before the FOMC announcement when the sector was up 1.15%. This group continues to baffle me and my thinking right now is that some shorts were looking to cover ahead of the FOMC comments on the economy. With many expecting the Fed to not make a rate cut, the thought of positive comments on the economy may have some of the stocks in the group fining bidders. Energy futures found very little upside, but Light, Sweet Crude Oil futures (cl02h) have recovered about 1/2 of its session losses at $19.08/barrel, after setting a session low of $18.56/barrel.

Retailing stocks as depicted by the S&P Retail Index (RLX.X) has held positive territory for the bulk of today's trading session and currently trade at their session high near $929. This is a group that most feel is "consumer driven" and the fact that this index remains near a 52-week high set on January 7th at $939.44 gives hint that current market weakness is more of a result of "investor confidence" lacking due to recent accounting issues than that of economic weakness.

As I write, I'm also seeing some gains build in the Semiconductor Index (SOX.X) as this index rises to $550 +3.2% and now is second to Oil Service (OSX.X) in % gains. This group did get some bullish comments this morning for several "foundry and test services" related stocks from Thomas Weisel. Their favorite ideas in the sector were TSM, AMKR, CHPC and UMC.

Jeff Bailey
Senior Market Technician
Option Investor

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