EC Can An October Rate Cut Really Help Stocks?

The Dow Jones Industrial Average has dropped over 800 points in the first two days of trading in October. (Photo by Drew Angerer/Getty Images)

The Dow Jones Industrial Average has dropped over 800 points in the first two days of trading in October. (Photo by Drew Angerer/Getty Images) GETTY

In my last article “Will The Fed Rate Cut Stall The Market's Rally?” I discussed the prior sharp decline in yields and the signs of technical deterioration in the stock market ahead of the FOMC meeting on September 17th. They cut rates as expected but the overall market has been lower ever since then.

In particular, I focused on the fact that the tech-heavy Invesco QQQ Trust (QQQ) had just formed a weekly doji which was a sign of indecision. By the following Friday, the QQQ closed below the doji low which generated a negative or sell signal. That chart also revealed a negative divergence in the on-balance-volume which was a sign of weakness as it indicated the volume was not supporting the rally. From the September 12 high to last week’s low the QQQ had declined 6.4%.

The selling increased last week in reaction to the ISM Manufacturing Index which came in at 47.8 well below the consensus estimate of 50. The very weak ISM reading was not supported by the PMI Manufacturing Index that came in a bit better than expected at 51.1. The PMI survey covers twice as many number of companies as the ISM report..

However, the ISM report did trigger some panic selling early in the week. As it turns out Thursday’s weaker than expected ISM Non-Manufacturing Index, which measures services, not manufacturing, briefly pushed the Dow Industrials down 300 points. The stock market quickly rebounded as Thursday’s drop completed the stock market’s correction low.

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Those who sold in a panic on the new recession fears are probably surprised to know that the Nasdaq 100 was up 0.94% for the week while the 0.33% decline in the S&P 500 was not as bad as most expected. Selling was heavier in the Dow Jones Transportation Average which was down just over 3% and the Russell 2000 which lost 1.33%.

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