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Wednesday, December 15, 2010

WALL STREET >>> US Treasuries Decision Bolster Stocks

Fed Day Rally Fizzles;
Major Indexes Still Hit 2 - Year High

The Dow landed at its highest level since September 2008 on Tuesday, but an early rally faded as the Fed’s policy meeting proved to be a nonevent and Treasury yields hit seven-month highs.
If standing pat were a sporting event, the Federal Open Market Committee (FOMC) would be poised for Olympic gold. Once again this month, the policy-setting group opted to maintain interest rates at their current record lows, between 0% and 0.25%. Additionally, the FOMC kept the size of its bond-buying program unchanged at $600 billion. The central bankers appear to have a tunnel-vision focus on the jobs market, as evidenced by the opening remark of today's statement: "The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment." The major market indexes had notched some solid intraday gains ahead of the Fed's afternoon announcement, thanks to respectable retail sales data, but stocks staggered back toward breakeven in the FOMC aftermath.

The Dow Jones Industrial Average (DJIA – 11,476.54) tacked on about 48 points, or 0.4%, after earlier touching a 27-month peak of 11,514.08. Nineteen of the Dow's 30 components ended higher, led by AT&T (T) and Kraft Foods (KFT). Meanwhile, JPMorgan Chase (JPM) set the tone for the 10 declining Dow members, while McDonald's (MCD) split the difference by finishing flat. Today's close marks the blue chip barometer's highest daily finish since Sept. 8, 2008.

The S&P 500 Index (SPX – 1,241.59) briefly fell into the red in afternoon trading, but recovered to close on a slim gain of 1.1 points, or 0.09%. Today was the SPX's best daily close since Sept. 19, 2008. Finally, the Nasdaq Composite (COMP – 2,627.72) bounced back from its own trip below the breakeven line, ending the day up 2.8 points, or 0.1%. Unlike its peers, though, the COMP failed to set a fresh two-year closing high, falling short of Friday's finish at 2,637.54.
The late-day selloff from session highs, Wall Street’s second in as many days, erased much of an 86-point rally on the Dow that had been fueled by stronger-than-expected November retail sales.

“The market was due for a pause and people are using the [quiet Fed meeting] to take some chips off the table. The risk-off trade has been gaining some momentum.”

The selling coincided with a slide in the bond market in the wake of the Federal Reserve deciding to keep interest rates at their historically low levels, as expected. The yield on the 10-year note settled near its highest level since May.
“For the first time in this whole multi year experiment on the part of the Fed, the bond market has taken over and has pushed back against the Fed's goal and desire of keeping interest rates low.”

Wall Street mostly yawned at the Fed's policy statement, which showed the central bank voted 10-1 to leave interest rates at their ultralow level. The central bank also didn't announce any changes to its controversial $600 billion quantitative easing plan, which is aimed at boosting the economy and avoiding a deflationary spiral by lowering interest rates.

The recovery is continuing, "though at a rate that has been insufficient to bring down unemployment", the Fed said in its statement.

Yet the Fed's inability to keep interest rates from rising was on display immediately after the meeting ended, with the yield on Treasurys hitting seven-month highs. The selloff in the bond market is partly a reflection of increased optimism about the economic recovery. However, it is also likely to have a dampening effect on the fragile economy by increasing borrowing costs for companies and individuals.

Still, the Dow closed at its highest level since September 3, 2010, joining its peers by making fresh 2010 highs.

The Dow closed higher on Tuesday as it extends this year's high. The mid-range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are overbought, diverging but are turning bullish signaling that additional short-term gains are still possible. If the Dow extends this year's rally, the August 2008 high crossing at 11,867 is the next upside target. Closes below the 20-day moving average crossing at 11,238 would temper the near-term bullish outlook in the market.

First resistance is today's high crossing at 11,514. Second resistance is the August 2008 high crossing at 11,867. First support is the 10-day moving average crossing at 11,379. Second support is the 20-day moving average crossing at 11,238.


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