The Fed ended much of the uncertainty in the financial markets yesterday when it announced that its key lending rate would stay between 0 - .25%, and there would be no additional expansion of its balance sheet through the purchases of government assets and mortgages.

Although it did not set a hard calendar date for a hike in interest rates, refraining from additional purchases of assets sent a signal to the markets that it would allow yields to rise. This scenario created the bullishness in the Dollar after the FOMC meeting.

Traders were expressing their desire for an improvement in the interest rate differential which countered any buying from traders seeking more risky assets.

The Fed also commented that the contraction in the economy was slowing. This provided additional support. Gains may have been limited as the Fed reported that inflation was expected to remain low.

Equity markets are trading volatile overnight. There is a conflict between those who want to see a larger correction and those who are playing the long side on the minor dips. One group feels that the other is prolonging the inevitable 50% correction of this entire March to June Rally.

Technically, the equity futures look as if the market is getting ready to rollover to the downside. The lower bottom formation is indicating that the support base is beginning to weaken. There may be one more rally which would set up another lower top. This would provide more support that a corrective move is starting.

The big challenge for the equity markets is going to be next month’s earnings reports. The huge appreciation in the broad stock market may have been created by a few stocks that substantially overshot their upside targets. It’s these over-priced stocks that are going to be trouble for the whole market if they cannot back the price appreciation with bonafide earnings results.

I am looking for heavy downside pressure to begin in the equity markets during July. The trigger for me will be the inability of corporations to back the huge price appreciation we have seen in some stocks since the market bottomed in March. Watch for more rally that fails to make a new high for the year. This will be the sign that the current rally is over.

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