Today’s market action continues to be motivated by optimism that the market will see the Fed cut rates on Wednesday by ¼ point. In fact the rally in today’s market is very much similar to that of six weeks ago before the ½ point cut. Should Bernanke and Co. decide not to cut rates its likely there will be a pretty good sell-off following the announcement. Reason for this is that the market has already priced in a cut in the short-term interest rates.
Interestingly enough though, a persuasive argument can be made that a cut is not really necessary at this juncture. Outside of those sectors that are directly tied to the subprime/mortgage woes, all the other sectors seem to be doing fairly well. In fact, a cut will further agitate inflation pressures that are already having to deal with the likely-hood of $100 Oil.
Market will probably continue act with guarded optimism in the days leading up to the Fed meeting, and based on what their news release says, will likely shape the course of the market in the near-term.