After decent earnings news from Lehman Brothers and Goldman Sachs, the Dow Jones Industrial Average was up 300 points in afternoon trading, while the S&P 500 was trading solidly around 1315, up 40 points on the day. The futures market was pricing in a 100% chance of a full percentage point cut in the Fed funds rate at 2:14 p.m. this afternoon. Never one to miss an opportunity to disappoint, the Bernanke Fed cut rates by “only” 75 basis points.

Now, that is a whopping cut–just not as whopping as the insiders wanted to see. And that means one more trip to the woodshed for Ben, until he gets the funds rate down to the rate on two-year Treasuries, or 1.5%. That’s only another 0.75% from the current level, and given Ben’s record, he may try to do it in three quarter-point cuts so it has no impact whatsoever. No wonder Treasury Secretary Paulson was looking so tired today, even admitting that the U.S. economy is in a “sharp decline” while refusing to use the “R” word. Well, maybe he is right, because if a decline is a recession, I guess a sharp decline is a depression.

Today’s vote was 8-to-2, with the minority wanting a smaller rate cut. The Fed admitted in their statement that “economic activity has weakened further” but pointed out that “inflation has been elevated” and “uncertainty about the inflation outlook has increased.” I would say that with the amount of money and credit they are creating out of thin air, uncertainty about the inflation outlook has decreased–it’s going to be really bad, for sure.

I have been saying that the all-clear signal would come on a breakout and close over 1326 on the S&P 500. The head-for-the-bomb-shelter signal would come on a breakdown and close under 1270. The average of those two levels is 1298, and the S&P moved down to exactly that level after the decision and then turned up. Against the backdrop of a “disappointing” albeit significant rate cut and all the short selling, put buying, cash building and trash talking, the market moved right up to close at 1329. The breakout is here.

If this is for real, there may be a token test of the 1312 to 1315 level tomorrow, and then a decisive move up over 1329. On such a test down and recovery, sell your puts or UltraShort S&P 500 ProShares (SDS).

If there is no test down, and the market heads over 1329 from the opening bell, sell your insurance position. You can go back on margin, buy calls or just get fully invested.

But if the S&P starts what looks like a test down and then breaks below 1312, and especially below 1295, it is headed for a retest of 1270 again. In that case, keep your insurance position in case 1270 fails to hold. The big negative today was the sharp drop in the VIX Fear & Greed Index back to the mid-20s. That could mean we need another jolt of fear before the S&P can go higher, or it could mean we’ll go up two steps, back one, up two, back one, etc., instead of seeing the slingshot higher. As always, we will let the market tell us what to do next and I’ll be in touch with what you should do now.