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Coordinated rate cut provides gains for stocks, but volatility is expected to remain. Early this morning, the Fed, along with several other global central banks, announced a cut in interest rates. Ironically, stocks initially moved lower at the open Wednesday, but have since moved into positive territory. However, after seeing huge losses the past seven trading sessions, one would expect the bounce to be stronger than it has been in early trading.

At 7:00 am ET, the Fed cut the Fed funds target rate by 50-basis points to a level of 1.50 percent. At the same time, the ECB cut its rate by 50-basis points and several other countries’ central banks cut rates as well. There are mixed emotions about this move with many saying it was absolutely necessary, while others view it as desperate measure, especially when done just a few weeks ahead of the FOMC’s scheduled meeting. Nonetheless, it seems that something had to be done to dam a falling stock market until the government can get out and use the money freed up to spend from the bailout package.

In earnings news, Alcoa (AA) kicked off the third quarter season with little fanfare, but the aluminum maker is seeing losses on the news. AA noted that soft demand hurt results with the company making just 37-cents a share, which was 24-cents below expectations. AA suspended its stock repurchase plan, another sign that capital is hard to come by as the global economy slows. AA shares are off more than 11 percent in early trading to a price below $15, a price not seen in more than 10 years.

Retailers provided same-store sales results for September, which continue to show weakness in the economy. Wal-Mart (WMT) did see growth of 2.4 percent in same-store sales, but this was below Augusts figure. Of course, WMT does tend to do better than most retailers in a slowdown because consumers turn to discounters for their daily needs. WMT shares are up nearly 2 percent in early trading with the S&P Retail Index ($RLX) up about the same amount.

Pending home sales showed strength in August with the index up 7.4 percent. This points to some improvement in home sales in the months to come and does show that lower interest rates and the decline in home prices is starting to attract buyers. What we need to see is several months of improvement in housing related data showing that the worst is over for the troubled sector.

Volatility is expected to remain the norm, which was obvious this morning when the Dow ($INDU) moved lower by more than 200 points and then move to gains of more than 100 points. The fear indices followed a similar path, spiking at the open and then seeing some relief. When the markets are trying to find a bottom, it is common to see extreme volatility, but it is definitely hard to say the worst is over just yet.  

Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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