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Volatile day after Fed cuts rates

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Stocks were flat to slightly lower for much of the day leading into Wednesday's rate cut and policy statement, and from there the fireworks started. It's surprising to see the Dow, S&P, and Nasdaq move so slightly - up 0.13%, up 0.03%, and down 0.11% respectively, on a day where interest rates were cut. It was much more volatile than that. Stocks sank initially after the rate cut announcement but the last hour of trading saw dip buyers and buy programs kick in and pull the indices into positive territory or flat. By the close the Dow gained 36-points, with the S&P 500 up a point, while the Russell 2000 (-0.63%) and the Transports (-1.21%) lagged. Bonds were up.

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Just as quickly as the trading programs sold after the Fed decision, they were back in full buy mode once the reversal hit, and the emotional money followed along. So at this point the market has moved on a reaction to Fed, and then came a reaction to the reactions, and today we should get more of a reasoned reaction to what the Fed's actions actually means for stocks.

So, we got the rate cut that most of us expected, and was probably fully priced into the market, and the Fed's press conference afterward did not rile up investors like we saw last time when Powell called it a "mid-cycle adjustment". He seemed more careful with his comments, reading mostly from a script. 7 of the 10 voting Fed members agreed with the 0.25% cut, two wanted no cut, and one wanted a 0.50% cut.

Technically, there was a big outside reversal day so we would normally see some buying to start the day from those who may have missed the upturn, but as the day wears on things will settle into more orderly trading.

It's not completely constant, but we have seen some weakness following FOMC meeting over the last year, following the rallies that lead up to them.

The next FOMC meeting is October 29-30 and currently the chances of a cut during that meeting, based on the futures, is about 50/50. The December 10-11 meeting shows an 60% chance of a cut with 48% expecting a 0.25% cut, and 11% expecting a 0.50% cut.

The S&P 500 (C-fund) had quite a day falling early, diving after the Fed rate cut, then spiking higher into the close to end the day up a point. The positive reversal day is quite apparent as you see the long kangaroo tail on yesterday's candlestick. The dust will settle some time today, and the index will likely start to move in the direction that the market dictates, rather than the direction that the fast moving day traders and program traders were pushing it yesterday. The gap is still open near 2940 and the double top is still overhead, but it has done some churning below that double top already so it could make another attempt at new highs if the bears don't keep the pressure on at this level.

The S-fund was down yesterday but it too closed well off the lows, creating a positive reversal day. That flat top formation is still in place so the bulls, who were pushing the small caps hard in the first half of the month, need to bust this above that potential resistance to keep the trend going.

The Transportation Index was beaten down yesterday after FedEx's weak guidance in their earnings report late on Tuesday. A gap was opened up in the process so filling that is always a good possibility in the short-term, but we'll see if the double top gravitational pull will continue to put pressure on this index and pull it down to the 200-day EMA again

The EFA (I-fund) closed rather flat like the U.S. markets while it clung within its narrow rising trading channel.

AGG (bonds) nearly hit the target we talked about yesterday (red arrow) where several resistance lines are meeting. If bond yields have bottomed, that resistance could be a short-term peak, but if the relief rally in yields is over, look for the AGG to crawl back into that blue rising trading channel.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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