STOCKS BALK AT COORDINATED RATE CUTS -- DOW REMAINS OVERSOLD -- GOLD BENEFITS AS SAFE HAVEN -- GOLD MINERS ETF SURGES -- BONDS FALL AFTER BIG RATE CUT -- WATCH TBILL RATES FOR CREDIT CRISIS CLUES

GLOBAL RATE CUTS FAIL TO INSPIRE... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The Fed, European Central Bank, Bank of England, Bank of Canada and other central banks cut interest rates in an effort to thwart the global financial crisis. In this rare showing of unity, the Fed cut the fed funds rate by 0.5% and the key rate now stands at 1.5%. There is not much room for further cuts. Despite these coordinated rate cuts, the major indices failed to hold their nerve and closed with sharp losses. Chart 1 shows 15-minute candlesticks for the Dow Industrials. The Average surged in early trading, but the advance stalled around 9600 and the Dow dipped to 9200 around 12:30. With an afternoon surge, the Dow challenged resistance at 9600 again in late trading. However, this bounce also fizzled and the Dow moved sharply lower in the final 30 minutes.

Chart 1

DOW REMAINS OVERSOLD... Chart 2 shows the Dow Industrials with daily candlesticks and RSI. The Average fell from 11500 to 9258 over the last three weeks, but RSI became oversold just today. Looking back, RSI last became oversold on 25 June, but the Dow did not bottom for another 11 days (yellow area). This is a valuable lesson in technical analysis. Securities can become oversold and remain oversold. The current oversold reading in RSI suggests that it is late in the game for selling. However, oversold readings also signify strong downtrends. Given the 15.99% decline over the last 14 days, the decline is clearly overstaying its welcome. However, even the smallest of rallies are failing and the Average remains in the falling knife category.

Chart 2

GOLD SURGES AS SAFE HAVEN... The streetTRACKS Gold ETF (GLD) surged over 2.5% today as gold broke the $900 barrier. The coordinated rate cuts were designed to revive the financial markets, but gold bugs seem to have a different opinion. One thing is for sure: there would not have been coordinated rate cuts if there were not a global financial crisis. As the hardest of hard assets, gold represents the only safe haven that is truly safe. I do not mean to be a scaremonger, but this is what the surge in gold suggests. Money is looking for safety. Chart 3 shows GLD breaking back above broken support and the 200-day moving average. Chart 4 shows weekly prices with GLD up over 8% this week. The next resistance area resides around 97.5-100. Chart 5 shows the Gold Miners ETF (GDX) finding support near its September lows and surging over 14% on Wednesday.

Chart 3

Chart 4

Chart 5

BONDS BACK OFF RESISTANCE... Bonds surged with news of the interest rates cuts, but fell sharply during the day and closed weak. Chart 6 shows the iShares 20+ Year Bond ETF (TLT) surpassing 100 on September 16th and then plunging below 95 on the 19th, just after the Paulson bailout plan was announced. As Congress got its hands on the plan, the stock market weakened and money moved back into the relative safety of bonds. TLT responded to the Fed cut with a sharply higher open today, but then fell sharply to form a large bearish engulfing on the day. In addition, this bond ETF gapped up three days ago and filled the gap with today's decline. Could bonds be putting in a top here? A decline in bonds would be positive for stocks. Money moving out of bonds (safer) would leave more money available for stocks (riskier). TLT and SPY have had an inverse relationship the last few months. SPY peaked in mid May and declined to new lows in October. In the meantime, TLT bottomed in mid June and surged to new highs in September. Also notice how TLT surged as SPY plunged over the last three weeks.

Chart 6

SHORT-TERM RATES REMAIN VOLATILE... Short-term rates reflect continued uncertainty in the markets. Short-term rates, as in the 13-week TBill Yield ($IRX), also reflect the current chaos in the commercial paper market. At the risk of diving too far into the fundamentals, companies tap the commercial paper market for short-term financing needs. Almost all big companies, including non-financial companies, use this market to finance their day-to-day operations. The commercial paper market is lubrication for our economic engine. Lehman, which went bankrupt on 15 Sept, defaulted on its commercial paper obligations and this led to losses at the Reserve Primary Fund, a money market mutual fund. Money market funds are supposed to be the safest investments around. Even though the return is low, money market investors were virtually guaranteed to get their principal back. With the Lehman default on commercial paper, this money market fund "broke the buck" and was not able to return the full principal to investors. Money market mutual funds, which buy up commercial paper, freaked out. Bids for commercial paper immediately dried up as money market mutual funds took their money elsewhere, namely short-term Treasury Bills.

Chart 7 shows the 13-week TBill Yield ($IRX) and the S&P 500. $IRX tumbled in mid September with a sharp decline from 1.6% to 0% (16 to 0 on the chart). The gap down occurred on 15 Sept, the day of the Lehman bankruptcy. Two days later, on 17 Sept, the 13-week TBill Yield touched zero. Investors were panicked enough to receive little or no return just for safety. Paulson, Bernanke and Company stepped in with the bailout package on 18 Sept. Even though the 13-week TBill Yield bounced back to 1% a few times, it remains at relatively low levels and this shows continued risk aversion. The Yield has been bouncing between .1% and 1.1% the last three weeks. A break above the mid September highs and a return to the August levels (1.7%) would show renewed confidence in the credit markets. This would reflect money moving out of short-term Treasury Bills. Remember, rates rise when bonds fall. Money from these proceeds would likely find its way back into the commercial paper market. To take this one step further, the stock market could rebound if and when the commercial paper market returns to normal.

Chart 7