Support Doubly Significant, Fed Funds Hike Imminent?

On the Monday leading into a busy week of economic data and Wednesday's FOMC Federal Reserve meeting risk takers absconded from the market. The World Bank worsened it's outlook for the global economy from the March prediction for -1.7% to -2.9% growth over the course of 2009. Citing prolonged weakness among impoverished economies the bank explained that the prospects for securing aid to these countries was "bleak". While most have expected a pullback in U.S. equities on the heels of such an impressive rally, the catalyst to spur such a move has been less foreseeable than the static dates representing government decision making over the past year. The S&P 500 50 and 200 day SMA will intersect before the 100 and 200, perhaps driving home the realization of how far stock valuations have come in such short order. Ironically the point of convergence for these levels of support corresponds to the psychologically significant 900 level on the S&P 500.

The FOMC meeting on Wednesday will create a great deal of buzz as the capital markets are pricing in a 50% probability for a 50 basis point Fed Funds rate hike sometime this fall. While the statement from the meeting may remain wholeheartedly "vanilla", the minutes released in a couple weeks may give better perspective to market handicappers. The yield curve continues to steepen and could mean higher profits for banks, yet the steepening process suggests that there may be demand destruction for access to funds as the demand for real goods continues to decline. 

Expect the S&P 500 to close below the 900 level on Monday or assuredly Tuesday if the ICSC Store Sales and Existing Home Sales numbers decline month over month. The NYSE listed companies have been declining over gaining by a factor of 6 on the day. The sentiment could truly be shifting here. Be prepared to move out of long positions and investigate shorts.