On the Mend? - November 4th, 2009

Today’s spotlight will fall mainly on the statements coming from the Federal Reserve meeting as well as on the rolling in of some reactions to the Automatic Data Processing (ADP) employment data. After last week’s correction, these twin fundamental pillars will likely guide the market for the weeks to come.

The market has already been moving to rally to the Fed news despite the ADP news coming in less than wholly positive. The payroll company data pointed towards more job losses than expected – 203,000 lost in October versus economists’ estimates for 190,000.1

Still, this appears to be digested as evidence that job losses may be slowing and that is going to help buoy the market. Holding onto these gains after the Fed statement will likely depend on a lack of extreme wording or big surprises.

It is possible that the statement will include indications that current conditions warrant maintenance of the extremely low interest rates for now. Investors are looking for reasons to continue putting money to work, but if the Fed hints at tightening, this time around the market might take it as a positive. However, the Fed has never taken steps before to raise rates or withdraw liquidity in such a mire of lousy jobs data. Normally, the nod would come after the employment situation has started to mend which is something that Friday’s report probably won’t deliver this time around.

Overall, look for the market to go higher off last week’s correction if there are no big surprises from the Fed or employment data. Last week delivered a large spike in the VIX, something which may be indicative of the bottom being formed. Simply put – if the so-called fear gauge showed a climatic level of panic and the S&P held support, it may continue working its way up barring any abnormal comments.

1 http://www.forbes.com/feeds/afx/2009/11/04/afx7083714.html