Fed Day

Tomorrow is Fed day. In my opinion, it has been awhile since a Fed meeting has held such importance. Not only is what the Fed does and says going to be important, even if you knew what it was, trying to figure out how the market will react will be a whole another issue. If I was trading it (which I won't be), you have the dollar up and long term interest rates up on your screen seeing how those react. That will be the guide to tell you how to trade the equity market. The most bullish scenario for equities is that the dollar goes down, interest rates go down, and equities are almost sure to fly. Next best scenario is that dollar goes down, interest rates digest the news staying flat and move up a little bit, and the stock market should move higher. A bearish scenario is the dollar moves up strongly.

I think the last scenario, dollar strength is the most likely scenario. The dollar has gotten pummelled over the last couple of months. It sold off hard today after chatter out of Europe that they may actually raise interest rates. I think the dollar is setting up as sell the rumor buy the news and would not be surprised to see dollar strength. I also think for once that the Fed may actually be looking at the dollar conscious of where it is trading. Finally, I am not sure how the Fed can risk seeing the 30 year mortgage rate spike. If the Fed is really looking at that, they have one of two options. Back down a little bit and maintain the status quo. The market my guess would worry less about inflation and yields will fall. The other scenario is they double down, announce more efforts at intervening to get interest rates down. This may work in the short term. This is the dollar goes down, interest rates drop and equities will surge scenario. That is a very high risk move by the Fed because the market could say forget it and have more revulsion to government debt sending rates higher. If the Fed choose such a scenario, it will be a short term fix (maybe a few weeks to a few months) but sets up for more major failure.

Either way you should have some fireworks. Usually the market gets a whiff of what the Fed is going to say or do so if the market is up right before the Fed announcement, it will go higher afterwards and vice versa. This was not the case January of 2008 when the Fed was completely not communicating with the market very well. Your bogy is the 875 to 880 area on the downside and 905 on the upside. I would be very surprised to see the market be above 900 to 905 before the announcement. If your bearish and as the announcement gets closer the market starts moving up into this range be very careful.

In general it has been a good bet that the Fed will do everything possible to receive some short term pleasure at the cost of destruction of our country in the longer term.

Watch the dollar, it will tell you all you need to know.