FED ANNOUNCES THAT IT'S READY TO START USING MORE UNCONVENTIONAL TOOLS TO STABILIZE THE ECONOMY -- PURCHASE OF BONDS IS ONE POSSIBILITY -- HOMEBUILDERS HAVE A STRONG DAY ON PROSPECTS FOR LOWER MORTAGE RATES -- MARKET INDEXES CLEAR 50-DAY LINES

FOCUS SHIFTS AWAY FROM SHORT-TERM RATES... The Fed cut its short-term Fed funds rate to "a target range" between zero and .25 today. More importantly, it announced that it was ready to take more aggressive steps to do whatever is required to get the economy moving again. That will involve flooding the system with additional dollars through open market operations. The Fed suggested that it was willing to expand its purchase of mortage securities. With further lowering of short-term rates no longer possible, the Fed is also considering purchase of longer-term maturities to lower long-term rates. Long-term rates have a bigger impact on the economy than short-term rates. That had a positive impact on Treasury bond prices which rose as bond yield fell further. The prospects of more Fed spending weakened the dollar and gave a boost to gold. The Fed's more aggressive tone also gave a boost to stocks, with the biggest gains coming in financial and housing stocks.

Chart 1

HOMEBUILDERS HAVE STRONG DAY ... Chart 1 shows the SPDR S&P Homebuilders Index (XHB) closing above its 50-day average for the first time in more than two months. And it did so on rising volume. Its relative strength line has been rising since late November. It's interesting that the better performance by homebuilding stocks started right around the same time that bond yields (bottom line) started plunging during November. That means lower mortgage rates.

Chart 2

MAJOR INDEXES CLEAR 50-DAY AVERAGE... A burst of buying after the Fed announcement pushed the market 5% higher and was enough to put most of the major market indexes over their 50-day averages for the first time in three months. The daily bars in Chart 2 show that positive crossing for the NYSE composite Index taking place on rising volume. That's a good combination and suggests that the market may be ready to climb all the way back to its early early November peak.