Rate Cut Stabilizes The Market

The trend turned from sharply down to neutral yesterday following a better outlook on GS and LEH, which was then bolstered by a 75 basis point rate cut.

Short positions should probably be covered.

The big question then, what is it going to take before it makes sense to go long again?

The first step would be a successful move back over the 50-day average at $135.65. Until that happens this move must be considered just as suspiciously as the last two bounces we have had this year.

That said, a handful stocks that have been knocking at the door of their 52-week highs in recent weeks are once again threatening breakouts. While the rest of the market battles out areas of resistance and support, you might consider putting money to work on the long side in the strongest stocks.

We would avoid trying to bet on the weaker stocks at this point. The chances of getting whipsawed out trying to pick a bottom in the banks and home builders is just too high even with recent rate cuts giving them a boost.

Outlook:

Near term capitulation may be put on the back burner with the Fed's continued aggressive posture. If the SPY can overcome its 50-day average, it may have a shot at testing the downtrend in the $142 area.