The Market's Fed Focus

Helene Meisler spots a sideways market with an upward bias.
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Uh oh! Here comes October!

The stock market is a funny place. It doesn't care about the present; it only cares about the future. And today's

Federal Open Market Committee

meeting isn't far enough into the future anymore, so now the topic of the day is the next FOMC meeting -- in October!

Heck, we don't even know what the

Fed

is going to do about rates this afternoon or what sort of bias it might adopt, and already the market is filled with speculation on the Fed's early October meeting! Everyone seems to assume that the Fed will hike 25 basis points today, and so there's no need to worry about that anymore. Now we must worry about October.

And why are they so worried about October? Because so many investors have now crossed over that line between bull and bear. One of the reasons I know that is anecdotal; I get it from the emails I receive. When I scoffed at the rally in early July, my mailbox was filled with folks telling me I was too bearish. They asked, couldn't I see how great this market was? (And some were not that kind.)

Then, last Friday, I

wrote about this obvious head-and-shoulders pattern in the

Dow

, which I believed from previous experience would fail and not work. In that same column, I went on to point out the improving market statistics on those down days.

What sort of emails did I receive? Almost every single one told me I did not know how to read a chart and that the head-and-shoulders pattern would complete itself. Not one email about those better statistics. That tells me the majority of investors out there are quite skeptical of the upside at this point in time. That's a big change from just six weeks ago.

If you'd rather not take my anecdotal evidence on sentiment and would prefer something more concrete, then how 'bout the specialist short-selling ratio? For three weeks in a row now, that ratio has been at 40%. This is down from a high of 53%. Oh sure, it can go lower, but I'd point out that it was only 37% at the low last fall. That says we're closer to the bearish side of sentiment than the bullish.

Now I won't lie to you and tell you this is a great rally. It isn't. As has been typical throughout this entire year's run, the advance/decline line does not act well on up days. In fact, Monday's a/d was not as good as Friday's, yet the averages all performed better. And here we have the Dow making a new high while the

S&P 500

and

Nasdaq

lag far behind. Also, the number of stocks at new highs failed vs. the previous Dow high.

In addition to all that, we're nearing a moderately overbought condition in the market at the end of trading on Tuesday.

But -- and this is a big but -- there are some other indicators that tell us this market is not ready to roll over right now. First, there's the lack of bullishness discussed above. Also, if we look at the new highs and new lows on a 10-day moving average, it says there's still room to move on the upside. And finally there's the

McClellan Summation Index

. This is based on the advance/decline line, and it moves very slowly and rarely gives a false signal or whipsaw. A week ago we had to squint to see this indicator curling under; we no longer need a magnifying glass to see its turn.

Now maybe the Fed does something no one's expecting, and that takes the market down. Or maybe it's just the illiquidity of the last few weeks of the summer that does that. Or whatever. But it seems to me that the overbought/oversold oscillator will not make a lower low into such a decline, and thus would show a lessening of downside momentum. Also, so many stocks have come so far off their recent lows that it's likely a majority of them would hold at higher lows. (See the discussion on

eBay

(EBAY) - Get Report

in Friday's column.)

So what stock charts look good at this point? In the Dow,

Caterpillar

(CAT) - Get Report

has been base-building since April.

Disney

(DIS) - Get Report

is somewhat overbought up here but should look good into any dip.

3M

(MMM) - Get Report

continues to emerge from its long basing period.

Outside the Dow, I continue to write down those cereal stocks,

General Mills

(GIS) - Get Report

and

Kellogg

(K) - Get Report

.

Telmex

(TMX)

has had a nice correction and looks OK again. In tech land, I'd say

Lucent

(LU)

is OK here.

On the negative side,

Coke

(KO) - Get Report

looks oversold but couldn't even hold onto its gains on Monday.

McDonald's

(MCD) - Get Report

is bothersome too.

Elsewhere,

Limited

(LTD)

is a sale on a rally back to 44 or 45.

J.C. Penney

(JCP) - Get Report

has some support below but doesn't seem to want to bounce.

Xerox

(XRX) - Get Report

has now bounced enough from its bad news disaster. And

Sara Lee

(SLE)

just drifts lower.

With so few pound-the-table bulls out there, it's hard to imagine the market falling apart just now. It's more likely the moderately overbought reading we get this week will not take us to new lows -- it will just make for a sideways market with an upward bias.

Author's note: My husband and I are moving this Friday (just across the hall), so I will write my regular column on Thursday this week instead of Friday.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.