STOCKS VERSUS RATE CUTS -- INTRADAY VOLATILTY REMAINS HIGH -- DOLLARS SINKS WITH FED CUT -- GOLD AND SILVER SHINE -- FINANCE ETFS HIT RESISTANCE ZONES

FED CUTS AGAIN... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The Fed cut the Fed funds rate 0.5% to 3% this afternoon. This is the second cut in the last nine days and the sixth rate cut since August 17. In its policy statement, the Fed noted the ongoing credit crunch, stress in the financial markets, weakness in the housing market and a softening job market. Economic weakness was confirmed with a report that fourth quarter GDP rose .6%, which was the lowest growth rate in five years. The weakness we have seen in stocks over the last few months is now playing out in the economy. Perhaps more worrying, the six rate cuts have yet to buoy the stock market. Chart 1 shows the Dow Industrials with the six rate cuts (blue dotted lines). The red line shows the August 17 closing level. Despite these six rate cuts, the Dow is well below this level and has nothing to show for sharply lower interest rates. On Chart 2, the 50-day moving average crossed below the 200-day moving average earlier this month. The Dow is also meeting resistance from broken support levels as it closed well off its intraday high today.

Chart 1

Chart 2

WILD DAYS CONTINUE ... There were some wild swings last week and they continued this week. Last Wednesday, the Dow was down over 300 points in the early afternoon, but reversed course and closed with a 299 point gain. The total swing was over 600 points. Even though today's swing pales in comparison to last Wednesday's, it still gave traders a wild ride. On Chart 3, the Dow was up around 200 points just after the Fed cut, but gave it all back and closed down 37.47 points. It looks like investors got second thoughts after the interest rate cut. "Never short a dull market" is an old Wall Street adage. Perhaps we can turn this around to imply "never go long a volatile market."

Chart 3

DOLLARS SLUMPS ON FED DECISION... The Fed decision put downward pressure on the U.S. Dollar Index ($USD) and bolstered the euro. Lower interest rates make dollar-denominated bonds less attractive for foreign investors. The Fed also indicated that further interest rate cuts might be necessary to prevent a recession. This put even more downward pressure on the greenback. On Chart 4, the U.S. Dollar Index formed a triangle over the last few months and broke triangle support with a sharp decline today. With the big trend already down, the support break signals yet another continuation lower. Chart 5 shows the Euro Trust ETF (FXE) with a surge to resistance over the last few days. The ETF traced out a cup-with-handle pattern over the last two months. A break above the Nov-Dec highs would affirm the current uptrend.

Chart 4

Chart 5

GOLD AND SILVER HIT NEW HIGHS... With the U.S. Dollar Index taking another hit, the streetTRACKS Gold ETF (GLD) and the Silver ETF (SLV) surged to new highs. Chart 6 shows GLD in a clear uptrend with RSI trading above 70. Even though RSI is overbought, you can see that this did not stop the advance from early September to early November. RSI became overbought a number of times during this period and GLD kept right on trucking (first yellow section). This was a classic situation of RSI becoming overbought and remaining overbought. This is what happens in strong uptrends. The converse is true in strong downtrends. Securities become oversold and remain oversold in strong downtrends. Chart 7 shows the Silver ETF (SLV) breaking flag resistance last week and hitting a new high this week.

Chart 6

Chart 7

FINANCE ETFS HIT RESISTANCE... After leading the charge last week, a number of finance-related ETFs are stalling at resistance this week. Chart 8 shows a number of technical features coming together to mark resistance around 28-30 for the Finance SPDR (XLF). First, the falling 50-day moving average sits at 28.68. Second, broken supports from the November-December lows turn into resistance. Third, the October trend line marks resistance around 29. With the overall trend down, the going is likely to remain tough as XLF trades near this resistance zone. Chart 9 shows the Broker Dealer iShares (IAI) meeting resistance from broken support and the 50-day moving average around 48. Chart 10 shows the Regional Bank HOLDRS (RKH) stalling at the top of its resistance zone. The ETF performed better than IAI and XLF by breaking above its 50-day moving average, but still has considerable resistance around 135.

Chart 8

Chart 9

Chart 10