The Fed really played it safe with their statement in saying the pace of the recovery has slowed. That is like saying snails crawl slowly. No real news there.

Market Statistics

The Fed kept the "exceptionally low…for an extended period" comment in the statement and that makes ten consecutive meetings the FOMC has used that terminology to indicate no changes in the foreseeable future.

The statement presented a much more detailed view on inflation than in the past. Specifically they said underlying inflation measures remain below those consistent with price stability. "With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate." This means the FOMC views inflation as too low and is actually worried about deflation to the point they are pointing it out in the statement. This is a further confirmation that the FOMC will remain on hold for a long time.

The statement was bearish and suggested the Fed is about ready to significantly downgrade their outlook for the economy for 2011 when the quarterly forecast is released in November. They noted high unemployment, low income growth, decreased housing values, tight credit, weak residential construction and bank lending slowing as factors weighing on the economy. The only positive was a mention that business investment was increasing although at a slower rate than in prior months.

The FOMC said it "is prepared to provide additional accommodation if needed to support the economic recovery and return inflation, over time, to levels consistent with its mandate." This was a new sentence and suggests if growth continues to lag and inflation does not increase soon, the Fed could take additional steps. Most commentators believe this was a clear warning the Fed is poised to initiate additional steps at the next meeting on November 3rd. With the election only five weeks away the Fed did not want to give either party additional talking points by taking action today. With the next announcement the day after the elections analysts think the Fed was warning of a new Fed move in November. The expected moves will be additional quantitative easing and a reopening of the Fed lending facilities to boost bank lending.

The tone and content of the statement suggests the FOMC will not be raising rates until late in 2011. Before it can raise rates it will attempt to remove some of the other accommodative measures and shrink its balance sheet in order to remove cash from the system. A rate increase will be one of the last steps they will take when the economy begins to pickup speed.

Kansas City Fed President Robert Hoenig was still a dissenter. He was the lone vote against the statement as released. He believes the Fed funds rate should be increased sooner rather than later and in order to do that the FOMC must first remove the extended period language.

The market rallied on the news because investors believe further Fed action will help the economy and that will push the equity markets higher. The statement was seen as a pledge by the Fed they will do whatever necessary to prevent a double dip recession.

The dollar was crushed on the release of the statement because the implied warning about future quantitative easing is a direct threat to the value of the dollar. Quantitative easing is the equivalent of printing new money at warp speed. Gold rallied to a new high over $1290 on the announcement.

Dollar Index Chart

Gold Chart

In the economic reports the New Residential Construction for August surprised on the upside with 598,000 housing starts on an annualized basis. This was an increase of +11% over the July levels of 541,000 units. The consensus estimates were for a decline to 550,000 with some numbers as low as 530,000. This was a bullish surprise but there was a hidden gotcha.

The majority of the housing starts were for multi-family dwellings. There were 32,200 starts on multi-family units and only 4,300 starts for single-family homes. It is still a positive report but less so than if the component starts had been reversed. Any number under 600,000 represents a potential decline in future inventory levels. The low was 488,000 in January 2009.

Housing Starts

Reports due out on Wednesday include the Mortgage Applications Survey, Purchase Only Home Price Index and the Oil and Gas Inventories.

After the bell Adobe reported earnings of 54-cents that beat analyst estimates for 49-cents. Revenue rose +42% to $990.3 million thanks to strong demand for CS5. Adobe also said it added 174 employees in the quarter. Unfortunately Adobe forecast earnings for the current quarter between 48-54 cents and analysts were expecting 53-cents. Adobe said corporate budgets were still tight with cautious spending. The slightly lower predictions knocked -$6 off ADBE shares in after hours.

Adobe Chart

Chipmaker PMC Sierra (PMCS) also guided lower after the bell and it was not pretty. PMCS slashed its outlook for the current quarter without giving any reason why. New guidance was for revenue between $161-$163 million compared to prior guidance from $169-$177 million. The analyst estimates were for $173 million. The company said it expected spending to decline but gross margins would also be lower.

PMCS Chart

Infineon raised its fiscal 2010 revenue forecast for a fourth time due to higher than expected sales of smart phones. They are now projecting a +50% increase in revenue with a profit margin of 14%. This compares to a mid 40% prior estimate. Q4 revenues are expected to rise +15% over Q3. In August Infineon agreed to sell the wireless unit to Intel. Do you think maybe they are having second thoughts today? Intel already cut its forecast for Q3 citing weaker than expected sales of PCs so they need to branch out into other products. Morgan Stanley downgraded estimates for Intel today as well.

Research in Motion (RIMM) is expected to announce its competitor to the iPad at next week's developer's conference according to the WSJ. The "BlackPad" is scheduled for release in Q4 and will feature a seven-inch screen and Bluetooth and broadband connections. It will have an entirely new operating system built by QNX Software and dump the Blackberry 6 OS. RIMM bought QNX earlier this year and will eventually replace the OS on its Blackberry phones as well. The tablet is being made by Quanta Computer in Taiwan using Marvel chips. RIMM gained +4% on the news.

Amazon is rocking despite the 50-cent loss today. That loss came after it broke out to a new intraday high at $153.31. Amazon is hot because of the quarter is expected to be very strong based on their repeated upgrades to the sales of the Kindle. Amazon normally reports in the second or third week of earnings season making their earnings less than four weeks away. There is chatter in the market that Amazon might be getting ready to take a run at acquiring NetFlix. Amazon is growing its video on demand service with a strong partnership with Tivo. NetFlix has roughly 15 million subscribers so adding those subscribers to the ranks of Amazon buyers of all things including video would be a very strong motive for an Amazon purchase. NetFlix (NFLX) has an $8 billion market cap but it would probably command a significant premium. Amazon's market cap is $68 billion so there would be no problem with digesting NetFlix.

Amazon Chart

Netflix Chart

The BHP CEO may be hearing the footsteps of angry shareholders. CEO Marius Kloppers said BHP would rather drop its $39 billion bid for Potash than pay something that exceeds good value for BHP shareholders. He said he was unconcerned about the growing possibility of a competing bid from Sinochem and their partners. When asked if the bid moved much over the current $130 BHP bid would BHP drop out, he replied emphatically yes. Sinochem has hired Deutsche Bank and Citigroup to evaluate a possible breakup bid for Potash. BHP bid $130 and POT shares have been holding in the $150 range.

Potash Chart

Petrobras (PBR) is scheduled to price the biggest secondary offering ever on Thursday. The offering is expected to raise $79 billion and dwarf the $36.8 billion offering by NTT in 1987. The largest recent offering was the $22.1 billion IPO of the Agricultural Bank of China earlier this year. Petrobras is going to use the money to help fund the $224 billion 5-year development of their new offshore oil finds. Citigroup, Bank America, Morgan Stanley and Santander will make a fortune underwriting the massive offering. The transaction has been delayed for months due to government interference in the process even though it will boost the government's ownership of the company. The Brazilian government is selling Petrobras five billion barrels of oil for $8.51 per barrel payable in shares in the company. This is oil Petrobras is expected to produce in the future not oil they have today. It is essentially a prepayment of royalties for future oil.

The pending share sale has depressed the stock price of Petrobras for the last six months because of confusion over the terms, price and number of shares. This will raise the market cap of Petrobras to be equal to that of Chevron.

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Petrobras Chart

The White House announced today that another top aide was jumping ship. Top economic advisor, Lawrence Summers, is leaving the administration before year-end. In the last couple months budget director Peter Orzag and Council of Economic Advisers Christina Romer jumped ship and went elsewhere. This leaves Timothy Geithner as the only top tier adviser to the administration as of year-end.

The Dow stretched its gains to 13 of the last 15 days but the Nasdaq and S&P finished slightly lower. After Monday's big gains for these indexes to close anywhere close to flat was a bullish event.

The S&P rocketed above solid resistance at 1130 on Monday and found support at 1135 today. Investors got what they wanted from the Fed announcement but the immediate post Fed spike was sold off into the close as traders took profits. The news was already priced into the market on the rally of the last two weeks. The afternoon weakness was simply a sell the news event. This could easily carry over into Wednesday since the market normally declines the day after a FOMC meeting.

The market action from last week was a positive consolidation of the prior two-week rally. Monday's spike was a breakout of that consolidation and some serious short covering. Tuesday's minor decline was not enough to damage the trend and the bulls should still be in charge.

Fund managers who missed any part of the recent move are in serious trouble and will be forced to buy any dip in order to join those who were already long. Their time remaining before the year-end statements are produced and bonuses calculated is growing short. They may not want to buy this over extended rally but they have no choice but to chase performance.

With the S&P breakout over 1130 the next resistance is 1150 and the target is 1240. That is 100 points away and several analysts are claiming we will see it before the elections and 1300 before Thanksgiving. With the bulls in attack mode that is entirely possible. Yes, we could still see selling ahead but I think the dips will still be bought. The trend has changed from choppy to positive and the bears will have to live with it.

S&P-500 Chart

The Dow has already moved over critical resistance at 10,700 with Monday's strong gains. This breakout is now targeting 11,200 and we could easily see that over the next couple weeks if the bulls can maintain traction and the economic reports continue to be "less bad."

The break over 10,700 is the equivalent of an S&P move over 1150. Over the weekend I pointed out that the S&P was the stronger of the two indexes but the Dow has now taken the lead. We need the S&P to push through 1150 before too much time passes in order to reduce the opportunity for the bears to mount a major defense. They are in retreat today and I hope they stay unorganized.

Support on the Dow is now 10,700. I can't even believe I am saying that but it shows how sentiment has changed.

Dow Chart

The Nasdaq is very overbought but the tech generals are still leading the charge. Stocks like AAPL, BIDU, GOOG and AMZN have been on fire the last several days. We started to see some profit taking today but it was very light.

I was eating out on Monday and sat near four retired men. Their entire conversation was centered on why Google and Apple were the only stocks to buy today. This is either a prime example of why we are moving higher or a technical indicator of a top in progress. When stock tips become the lunch topic of what I would classify from their conversations as very novice traders then sentiment has definitely changed. If retail traders are always the last to buy the market then fund managers should be running for the exits. Fortunately I don't see that in the internals. While I would not buy Apple or Amazon today because of their overbought status, I do believe they have farther to go. I would simply be looking for a dip rather than chasing the winners.

Fund managers may be wishing for a dip in the Nasdaq but even a monster drop in Adobe tonight could not make it happen. Nasdaq futures are up at 8:PM. They may want a dip but they will have to hold their nose and buy if that dip does not appear.

Nasdaq support is a very close 2345 followed by 2290.

Nasdaq Chart

On the negative side of the discussion is the Russell 2000. The index failed yesterday and today at strong resistance at 670. This shows fund managers are chasing blue chips because of the relative safety and still don't have any confidence in the long-term direction of the market.

Russell Chart

In summary, the market needs a rest but despite today's minor decline we are not seeing anything in the internals that is pointing to a pending decline. The new 52-week highs were 404 today compared to 62 new lows. That compares to 528/77 on Monday but still strong. The volume is increasing with eight billion shares today.

I remain in buy the dip mode rather than chase the winners. Those dips may be short and shallow so investors will need to be nimble. I believe sentiment has changed despite the gloomy Fed statement. Investors are looking ahead to the period after the elections and buying now rather than expecting an October decline. They appear to be discounting the potential for a second recessionary dip and that is bullish for the markets.

Jim Brown