Stocks' rate-cut gains have short life

NEW YORK -- We've heard it before. Every time Nasdaq 100 futures get near a technical support level and then have a big bullish day the pundits begin to proclaim that the bottom is in. Wednesday's monster rally sparked by a surprise interest rate cut by the Federal Reserve sure looked like a major change and by some measures it was. However, market action Thursday and Friday has all but negated the shift, and now we must question whether this was just what investors wanted and not what the market wanted.

Technically, such a strong rally as Wednesday's is usually followed by a spate of profit-taking. As long as certain technical changes made by the rally are not reversed, the change in trend is valid, even as prices drift lower in the correction.

The problem is that Nasdaq futures have dropped below the key 50 percent retracement level of the rally and when more than half of a gain is lost we must automatically question the validity of the rally in the first place.

Was it just an aberration caused by hungry bulls being tossed a hot meal of whatever it is bulls eat?

Of course the market will rally when what everyone was hoping for suddenly appears in spades.

The question is whether the meal will last or will the famine continue. Unless prices start to rise soon, the technical reversal seen Wednesday will be erased and that leaves us with just more corporate earnings warnings and an economic slowdown.

The other half of the market -- the S&P 500 and Dow Jones Industrial Average -- are not quite as negative.

S&Ps failed to set a lower low last week and that is a technical positive. The Dow remains in a flat range and in the big picture, neither index had any technical event of significance Wednesday. It was just a remarkably unremarkable rally.

There is an old Wall, and now LaSalle, Street adage that says "Don't fight the Fed." When the Fed starts to lower interest rates, stocks and all their derivatives are usually much higher a few months down the road. The price of money, and therefore the cost of business, is going down. This is good.

What isn't good is the way the market reacted to the news. When markets go down on good news, something is really wrong and with the window for a positive reaction closing fast there may be plenty to worry about. Wednesday was a record day in terms of price and volume, but why was the New York Stock Exchange volume even higher Thursday on the pullback? That was certainly not good.

Has the market bottomed? Maybe. This is something we can see in only hindsight and trying to pick the bottom is a very dangerous proposition. Not even Alan Greenspan can make it happen all by himself.

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