Expecting Resilience

I think the market could go decently positive today. It has opened weak and is fluttering around, but I think the fact that yesterday's rally was so powerful and the market held the 850 level will leave shorts a bit hesitant to jump back in right now and give longs a bit of confidence to step up and lead the market higher. Libor has trended down over the past 13 days and commercial paper issuance on Monday was 10 times larger than actual issuance during the prior week. This indicates that the credit market is thawing. I'm sure most will still remain skeptical, thus limiting the upside and keeping market action choppy. It only takes one adverse event to break the trend. One stock that could move higher here is CEC. It recently gapped down but looks set to fill at least some of the gap above. If the market rallies like I expect, it could have some decent upside here.

The Federal Reserve's decision at 2:15 should be a very big market event. The market will likely headfake and then swing big in one direction. The market's expecting 50 bps (taking the Fed Funds down to 1 %) and will not be too happy if the FOMC surprises with 25 bps. I doubt the Fed is in a mood to disappoint, so I think 50 bps is a given. Below is a quote from a recent post by John Jansen over at Across the Curve. He goes into a bit more detail about how the Feds actions will effect the yield curve and an opportunity for a steepening trade.

"If the FOMC adopts such a dovish stance as I suspect they will, I believe that augurs for a much steeper yield curve. The front end of the bond market will benefit from reduced funding levels while the weight of supply will depress longer maturities.

I also believe that reduced consumption in the US can perversely lead to higher rates in the belly of the bond curve. As consumption declines the trade deficit will improve and there will be less dollars sloshing around overseas for recycling back to the US market."