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Ninth Time Is A Charm\?

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       10-2-2001           High     Low     Volume Advance/Decline
DJIA     8950.60 +113.80  8950.60  8798.40  1.3 bln   2072/1055
NASDAQ   1492.33 + 11.87  1504.24  1473.13  1.7 bln   1973/1578
S&P 100   539.57 +  6.17   539.57   530.02   Totals   4045/2633
S&P 500  1051.33 + 12.78  1051.33  1034.47
RUS 2000  401.79 +  4.19   402.12   397.53
DJ TRANS 2170.44 + 28.28  2179.34  2142.79
VIX        34.07 -   .71    35.77    33.93
VXN        63.84 -  1.10    64.71    63.20
TRIN        0.90
Put/Call Ratio       .72

Ninth Time Is A Charm?
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Just another flat day where the market ends opposite of expectation. After eight interest rate cuts this year that have resulted in selloff, it finally seems fitting that markets would finish strongly to the upside following cut #9. Either interest rates have nine lives, or the ninth time truly is a charm. Still we should not read much into the end of the day closing rally. The closing rally and rate cuts had little to do with each other.

Judging by my writings lately, one could get the impression that I am a pessimist. Let me engage you for a moment here with some semantics to persuade you that I am not. I am not a pessimist. I am an optimist. While I may be pessimistic on the economy, I am a realist and understand we may be in for some rougher economic times ahead. The bottom is yet to be found. The Fed and everyone else, excepting those engaged in wishful thinking know that. However, I also understand that downside to the market means opportunity for trading profits and I am extremely optimistic about that. The point is to not mistake today's close for "the bottom" (so often proclaimed by charlatans posing as analysts) now that interest rates have been cut for the ninth time this year.

While I am mostly of the opinion that rates no longer matter as much in a severe economic downdraft (think of pulling hard on the controls of an aircraft to keep it flying against said downdraft), we still don't want to enter an apathetic state. To some extent they do matter and the following is the most convincing argument I have heard in favor of rate cuts. My hat is off to Greg Jones at Briefing .com for penning the following piece. It is so good, I will quote the whole thing here with full credit to him. It would not come any better from my brain.

"The silliness that always accompanies Fed meeting never ceases to amaze, so let's get right to the task of dispelling the myths. Myth 1: The Fed is running out of ammunition. This myth is propagated by pessimists who want you to believe that the Fed can't do much more for the economy now that the funds rate is down to 2.50%. But by our tally, that leaves 250 bp more of rate cuts in the arsenal, which can make a significant difference to business borrowers and households with mortgages. Beyond that, the Fed can just pump reserves into the system even with rates at zero (the Bank of Japan is doing that now). We probably won't get to that point, but it's important to understand that the Fed still has plenty of ammunition.

Myth 2: the Fed needs to stop cutting rates because it risks undermining confidence and hurts those who depend on deposit rates. This is probably the silliest of the myths. There are still those who believe that the Fed can make everything better by pretending everything is better. Psychology has a role in any economy, but the idea that the economy is nothing but a con game is false. If the economy is hurting, the Fed does not help matters by leaving rates high and telling us that everything is rosy (they kept rates high in the early 1930s, and that didn't work so well). Also, though depositors can be hurt by lower rates, we know for a fact that lower rates, on the whole, stimulate growth.

Myth 3: The 50 bp rate cut must mean that the economy is worse than we feared. OK, maybe this is the silliest of the bunch. Let's make one point clear: the Fed knows just as much about the economy right now as the rest of us, which is not much. After the Sep 11 attacks, the economic outlook is more clouded than ever and only the passage of time will clarify that. The idea that the Fed has more information that confirms a bleaker outlook presumes that such information exists. Even if the Fed already knew Friday's employment report (which it doesn't), that would hardly matter. Who really believes that a report detailing the economy in the week of Sep 14 tells us anything about the future?

The Fed cut rates aggressively today because the country just suffered an unprecedented attack at a time of economic vulnerability - to quibble about 25 bp in this environment would have been irresponsible. So here are the real takeaways today: 1) the Fed cut 50 bp because it was the right thing to do, 2) the Fed, like the rest of us, doesn't know what is coming next, 3) Fed rate cuts are most definitely good for the economy, and 4) the Fed has plenty of ammunition left to lift the economy should it become necessary. - Greg Jones, Briefing.com"

I take exception to some of this because reducing rates must go hand in hand with increasing liquidity, something the Fed did after September 11th. However, last week, the Fed began reeling it back in. Banks are really in no mood to lend to business (though cheaper home loans remain strong). As Steve Forbes noted today, it is like service stations immediately dropping gas prices from $3 to $0.75, but not having any gas to sell at those prices. Where is the benefit?

Be that as it may, it has nothing to do with the charts in which we depend on greatly for trading. Peak over my shoulder.

Dow Industrials chart (INDU):

While stocks showed some weakness through much of the day especially following the 50 bp rat cut to 2.5%, that did not stop the Dow from rising 113 points to close at 8950 on 1.28 bln NYSE shares traded. Our primary focus here should be on the daily chart, which shows a now overbought condition with strong overhead at 9000. 60/30 charts are also flirting with overbought, but not quite there yet. Those with sharp eyes may have already noticed a bearish divergence forming with a higher high stochastic and candles far lower than the 10,500 corresponding to the last stochastic high. Would consider put opportunities at this point as the next big move, though the weekly chart is showing some good strength. Of course, following the downdraft of two weeks ago, the last week looks like stable air by comparison.

NASDAQ-100 chart (NDX):

Chop, chop! Flop, flop! This is not Benihana, but the NASDAQ. Note the doji candle on the weekly chart - major indecision on investors' part on where to take it from here. Anybody left standing still looking for a tech recovery to old highs? Don't look here. None of the old generals are in any shape to move this one up the charts. The daily candles' neutral wedge formation and stochastic weakness foretell more downside or at least sideways. The 60-min chart shows a bearish divergence with higher candle highs but lower stochastic highs. Whatever happens, do not look for new highs here.

S&P 500 chart (SPX):

For the Mother of all indexes, let us examine the SPX. Weekly looks good with rising candles and stochastics. But the daily chart has all the makings of a soon to be admitted hospital patient. Stochastics are just beginning to turn down from overbought at 1050 resistance. While it could go higher, the overbought stochastic is diverging from a much lower current candle. Meanwhile the 60/30 charts are flirting with overbought and threatening possible reversal soon too. Unless you possess lightning quick reflexes of SuperTrader (look for the "S" on your nylon shirts and blouses), I would be extremely wary of buying calls here. I do not read much into the push upward into today's close.

That said, VIX made a major move down roughly two points to 34 as the market went up. That is pretty much a milestone since it has been backward lately, falling as the market fell and rising as the market rose. Today it behaved as expected - markets rose, fear slid, VIX reflects that. This is not the time to breath a sigh of relief. At 34, it reflects plenty of fear and shows on its stochastic oscillator that it may be about to rise.

For tomorrow, we might get some followthrough on today's close. But given the overbought conditions near points of resistance with resultant bearish divergence, it looks ready to tank, especially given the very mediocre volume and slow economic outlook. Choppy action is about all we get until the Americans figure out that 2.5% interest with 2.5% inflation is essentially dead money - it earns no return. What happened in Japan could never happen here? It just became more of a reality today. Respect the market's tendency to favor the bullish grasping for straws of hope, but prepare for better returns that will be ushered in as the market tops.

See you at the bell.

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