After a strong start on Tuesday, the indices reversed in the afternoon as they reacted to negative headlines about progress on a China trade deal. In addition, banks reversed prior day strength and utilities -- as measured by the iShares US Utilities ETF (IDU) -- pulled back on some concerns about a flattening yield curve. Strength in oil weighed on transports in the iShares Transportation Average ETF (IYT) , but the Nasdaq stayed in positive territory, as technology stocks held up well.
The DJIA has been struggling compared to the other indices lately, mostly due to Boeing (BA) . Small caps -- see the iShares Russell 2000 ETF (IWM) -- have lagged a bit also, but the stock picking has remained robust. Many stocks need some consolidation -- and that is reflected in choppier action, in general.
The market is still highly sensitive to any news on China trade, but the focus on Wednesday will shift to the Fed. The Federal Open Market Committee will issue its interest rate decision and policy statement at 2 p.m. ET. That is followed by Chairman Powell's news conference at 2.30 p.m. ET.
No rate change is expected at this time. The market is expecting confirmation of the dovish view that the Fed has embraced since the market low in December. Chairman Powell is expected to reiterate that the Fed will stay patient and not take any further action as it parses incoming economic data.
The market will be looking at the Fed 'dot plot,' which will set forth interest rate forecasts, and will also be looking for comments on what the Fed intends to do with its balance sheet. The unwinding has been put on hold and further confirmation of that would be of interest.
The market would react harshly if there was any hint that they are backing off from their dovish tone. That is unlikely to occur, which means the more important question is whether the market is going to celebrate confirmation that the Fed isn't planning on doing anything in the near term.
The market has a tendency to react positively to the Fed. According to the New York Fed, since 1994 the market has been up around 50 basis points during the period starting the day before the announcement and ending at the close on the day of the announcement.
Market players have a tendency to look for a "sell the news" reaction to the Fed, since the news is often quite anticipated. There usually aren't many big surprises, but Powell did surprise the market recently with his U-turn and dovish tone.
While no big surprise is likely to occur today, that doesn't mean that the market won't like to hear confirmation that the Fed is still extremely market friendly. I'll be watching for some solid underlying support if the Fed acts as expected.
The action in individual stocks has been a bit choppier over the last few days, but it is still a market that is favoring stock picking over market direction calls. We have to be selective and manage positions tightly, but there are still some good charts and a high level of speculative interest.
Trading in front of the Fed is often quite dull, but there will be a reaction to the Fed even if it is completely unsurprising. Stay vigilant and be ready to move.
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