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Fed funds stays at 1.75%

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Today's Federal Open Market Committee (FOMC) decision on interest rates was to leave the Fed Funds rate at 1.75%, but noted that the softening in the growth aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance.

The Fed said that the current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate over time.

Nonetheless, the FOMC recognized that, for the foreseeable future, against the backdrop of its long run goals of price stability and sustainable economic growth, the Committee was shifting from a "neutral" bias toward conditions that may generate economic weakness.

In essence, the FOMC is prepared to cut rates should economic conditions deteriorate further, but just not today.

The bond market responded rather bullish as bond bulls came back into Treasuries and the shorter-term 5-year YIELD ($FVX.X) 3.138% quickly reversed from unchanged levels back to a session low YIELD after the FOMC decision was released. Currently, this action has me thinking stocks are a bit suspect at current levels as cash appears to be seeking out the safety of Treasuries, despite some of the lowest YIELD found in years at the shorter- end of the maturities, while even the longer dated 10-year and 30-year head lower.

Stocks did reverse lower just after the FOMC decision, then rallied right back to levels found ahead of the FOMC announcement, but have since given back gains.

The Dow Industrials (INDU) 8,610 currently trades down 73 point (-0.82%) and continues to hold above yesterday's low of 8,582. It would most likely take some type of technical break of 8,575 near-term to have the Dow suspect to retracement support at 8,430. Conversely, a move much above Friday's high of 8,796 puts the 8,856 retracement in play as well as the still trending lower 50-day MA at 8,920.

Breadth at both the NYSE and NASDAQ has turned negative with decliners outnumber advancers by a 3 to 2 margin at the NYSE, while breadth is negative at the NASDAQ with decliners having the upper hand by a 5 to 3 margin.

There continues to be a greater number of stocks hitting new lows compared to new high at both the NYSE and NASDAQ. Today, there have been 72 stocks hitting new lows compared to 35 stocks achieving new highs. NASDAQ has 134 stocks hitting new lows compared to just 16 stocks trading new highs.

Jeff Bailey
Senior Market Technician
Option Investor

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