Sept 20th Market Recap and Looking Ahead to Fed Tuesday

U.S. markets finished higher today with the Dow gaining 145.77 points to close at 10,753.62 and the S&P 500 closed at 1,142.71, up 17.12.

The market worked higher ahead of tomorrow's FOMC announcement. Many traders who have gotten overly extended on the long side may be in for a surprise should the Fed fail to announce the start of more quantitative easing. The NBER today announced that the official end of the Recession was June 2009. Kind of makes it difficult for the Fed to launch additional measures, right?

But I digress. Homebuilder sentiment came in at 13 for September, tied with last month for the lowest reading since May '09. Below 50 means sentiment is negative. At the same time, Miami based homebuilder, Lennar (LEN) posted an earnings beat today on lower costs and more completed home sales. The catch though was that new home orders fell 15% from the same quarter last year as tax credits have expired.

The biggest mover of the market today was likely the record $5.2B of POMO injected into the market this morning. Whether the Fed openly admits it or not, QE2 is already essentially underway. POMO and HFT seem to be the only buyers in the market (aside from some short covering) as retail equity outflows have continued unabated for the past 19 consecutive weeks and in the week ended September 17th, insiders sold $441M worth of stock in 98 companies vs. purchases of $1.4M in 7 companies. (Sourced from Bloomberg).

In other news, Bank of America is expected to lay off 5% of its capital markets staff (400 employees globally) due to light trading volumes, according to CNBC's Charlie Gasparino. I would expect that this will be a theme this fall and that we'll be hearing from other brokerage houses re: layoffs during 3Q earnings releases in October. I've also heard of some second tier shops going from commission to salary plus bonus. It also bears repeating the rumor/(idea?) that BAC is cutting its employees at the end of this year to avoid paying them their year-end bonuses...Nice, huh?

With the Daily Sentiment Index at 80% bullish and AAII at 50% bullish, one must wonder if tomorrow could be the day that the sharp start-of-September rally will come to an end. I would imagine the algo traders will be in sell-mode baring any QE announcement from the Fed. But given the planned POMO operations for the rest of the week, the Fed's official dispatches may prove to be nothing more than a distraction from the seldom covered generational theft experiment (or should I say debt monetization) currently being carried out by the Fed.

The end of the week brings additional data regarding durable goods and housing. Given the data we've seen from the past few weeks, I'd expect this data to continue its slide for the worse. Should no QE be announced tomorrow, I'd advise taking the gains from any short term longs, and begin to build positions on the short side. The failure of the Fed to act in August resulted in a disappointed herd that left the market in droves for several weeks afterwards. Tomorrow's announcement could bring about a similar correction.