Stocks flat this morning following 2009 closing highs on Tuesday. The focus Wednesday is on the Fed with the FOMC statement expected at 2:15 pm EST. Asian markets moved lower overnight, but European stocks are seeing gains. The bulls have shown incredible strength in 2009, especially this past quarter with the Dow ($INDU) on track to record its largest quarterly gain. However, what the FOMC has to say about the economy and its exit strategy could have a large impact on the near term movement of stocks.

The housing and employment sectors have been a huge drag on the economy, though both have been showing signs of improvement. Housing got some good news this morning when the mortgage applications for the week ending Sept. 18 rose 5.6 percent with the gain at 12.8 percent when refinancing are included. The 30-year mortgage rate fell 9-basis points to move below 5.0 percent for the first time since mid-May. It will be interesting to see how housing performs once the first time buyer credit of $8,000 ends Dec. 1.

Jobless claims and nonfarm payrolls have shown improvement the past six months, but this sector of the economy remains a huge problem. The House approved a bill this week that will extend unemployment benefits 13-weeks in 27 states. If a state has an unemployment rate higher than 8.5 percent, than unemployed in that state can apply for an extra 13-weeks of benefits.

Insurance stocks could be under some pressure Wednesday after Morgan Stanley lowered its rating on the sector to "In Line" from "Attractive." Prudential (PRU) shares are off about two percent after being lowered to an "Equal Weight" rating. However, PRU shares are trading near $51, well above its 52-week low at $10.63.

General Mills (GIS) shares are up more than three percent after announcing strong earnings. The company stated that it is seeing strong consumer demand for its products, leading the company raising its full year outlook. GIS beat earnings estimates in its fiscal first quarter by 25-cents at $1.28 per share. GIS now expects to see EPS for fiscal 2010 between $4.40 and $4.45, well above analyst estimates for EPS of $4.26.

The FOMC statement is expected to provide some insight to the Fed's exit strategy. However, it seems unlikely the committee will provide much insight other than saying the economy is improving and that moves will be needed down the road to stave off inflation pressures. One move would be to scale back support of the mortgage market from the purchase of mortgage-backed securities. Regardless of what is said or not said, it will be interesting to see how traders react to the news, especially considering the huge gains seen this quarter.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site