For those of you that are regular readers of my weekly column, you know that I feel a totally new regime is in place at the Federal Reserve. The days of Mr. Greenspan are rapidly receding into the mists of history as the new Fed chairman, Dr. Benjamin Bernanke, places his stamp of authority ever more brightly on "the most powerful man in the world" position.

I waited until just after the cut to write this column because it was imperative to know what the outcome of the Federal Open Market Committee (FOMC) meeting was before I said some of the things I had on my mind. And it was also important to see how the Fed's actions of today were going to initially impact the stock market and bond market.

Well, believe me, there was a reaction and it was good for the markets as a whole and bad news for the group of mortgage lenders that have made "subprime" a dirty word for years to come. The message to them from the Fed was: "It is time to stew in your own juice, boys."

Some had hoped that the Fed would go so far as to lower rates a full 50 basis points. I was not one of them. My take was that the economy has not shown any crucial weakness so far (even today's gross domestic product, purchasing managers' index, and construction news was good) and until it does, only investor confidence needed to be addressed by the Fed.

Confidence? Yes, confidence. The Fed needed to assure the main players in the market that, if necessary, the Fed was quite willing to storm in and battle any sign of recession. At the same time, they had to let the subprime lenders know that this time there would be no fast drop in rates to bail them out of a very bad situation — one they created for themselves. (My suspicion is that the major players in the stock market would feel just fine if the subprime "bad guys" got their clocks cleaned.)

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This balancing act, accomplished quite well by the Fed's actions, in my opinion, is best seen in the words of the Fed statement issued with the news of the rate decrease. They used the statement to say it all. I don't usually do this, but I am going to print the three main paragraphs of the Fed statement. For, barring any unforeseen financial shock, it is clear as a bell exactly what they intend to do in December — nothing!

With my emphasis added, here it is:

"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

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The message is in the portion of the statement I emphasized, as you can see.

Presently good growth, but may slow some. The implication here is that if it does, the committee will act to mitigate possible adverse effects.

The 25 basis-point reduction is only to help what is perceived as a mild slowdown. But, the slowdown seems quite small at this point, thus only the quarter-point reduction. A reassurance to investors that growth is on track.

Inflation remains a risk. "Duh!" as my grandson says. Of course it does. It always has, so what is new? Every fiat money economy in the world can say the same thing. (For the moment folks, just forget the inflation risks.)

Growth and inflation moves are, in the opinion of the committee, well balanced by the economy's current healthy state. The implication here is that the Fed currently figures that the quarter-point cut is just fine for the foreseeable future. As I said, this is what tells me that December will be a non-event — that is, no rate change unless we experience some sort of presently unforeseen financial shock.

This was bad news for the subprime people, as I said, but after it was digested by the broader market players, it was great news!

Initially, the market tanked on the release of the drop in rate news. The S&P dropped 13 points to a minus six reading and the Dow dropped 100 points to 13,780. The half-point proponent traders had sold out of frustration.

But, the second read of the statement by the more level-headed traders said to them that this Fed means to see growth continuing. In the next 45 minutes, the market turned around completely and finished up nearly 140 points on the Dow and nearly 18 points on the S&P. That folks is no mean feat on an FOMC day!

So, what is my bottom line to all this? Well, the bond market sold off as the message of quite possibly no further rate cuts this year sunk in. That I expected.

I believe that bonds will likely settle into a three to four point trading range over the next three to five months as bond traders wait to see if the Fed is right about steady growth with mild inflation. That is quite a change from the seven to eight point ranges we have seen over the last 12 to 15 months.

As far as the stock market is concerned, if the turnaround is to be believed (and, with this plus-140 Dow close, they are voting up), they do believe that the Fed can make it work. While today's close was still below the highest Dow of October 9 (14,164) by over 230 points, it did break through some of the major overhead resistance.

The next few days will be crucial to see if the follow-thru is there to set a new high. If that happens, I expect that the Dow 14,500 target my SUPER CHART predicted several weeks ago may come sooner rather than later.

Click for Larger Image

My current SUPER CHART as of Oct. 31 clearly shows the power of this market (click to make it bigger). Note the circle in the third quarter, a low occasioned by the sell-off from the initial fears of the subprime problem. We touched the 200-day moving average on that selling, always a bit of a nail-biting time, but the average held and stayed well above my SUPER CHART KEYLINE (though it was touched intraday on Aug. 16).

The most recent second wave of selling could, at its best, only drop the average to the 50-day moving average (see circle in the fourth quarter) before it resumed its climb on Oct. 23. Currently, the Key Overhead Resistance (see top of chart) that must be breached before a serious challenge of the old Dow high can be mustered is at 14,000.

A break and close above this level will mark a serious move to set new Dow highs. Also in the SUPER CHART I have marked a "Momentum Indicator." This gauge (the yellow line) is currently reading at 58, quite a low reading, but above the 50 level and being above the 50 level indicates that there is a good distance we can go up before the rally momentum would begin to falter. To me, it looks like new highs are quite possible.

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But, as ever, you ask "Can it go the other way on us?" The answer is, of course it can. We will still need to see the market reaction the next three to five days. It is, as I said earlier, crucial that we hold the upward momentum and that major support level one and two (see chart) contain any selling if it were to develop.

Remember, this is a business of percentages. Currently, the percentages say we should go higher, but that can change. Right now, in my estimation, odds are about one in three that we might still get a serious test of these supports. But, until such a possibility develops, I like this chart.

My advice? I would continue to hold the purchases you made in August, following my Buy! Buy! Buy! column. Barring any unexpected market shock (which can always happen of course), watch for new highs into the end of the year.

From the standpoint of the SUPER CHART, this is still a quiet heady time for stocks! My hat is off to the Federal Open Market Committee for once again breaking new ground when it comes to tough stands and clear messages to the true investor.

Well, that's about it for today. Hope your coming investment week is a good one. Meantime, you keep I touch. I do! See you next week.

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