Stocks Mildly Lower into Final Hour on Rising Apprehension Ahead of FOMC Announcement

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Biotech longs and Retail longs. I added (IWM)/(QQQQ) hedge today, thus leaving the Portfolio 75% net long. The overall tone of the market is negative today as the advance/decline line is lower, most sectors are falling and volume is below average. Investor uncertainty over the outcome and commentary of the upcoming Fed meeting remains high. According to Bloomberg, futures imply a 48% chance of a 50-basis-point fed funds rate cut. There is a 52% chance for a 25-basis-point cut. I still think a 25-basis-point cut is likely in the fed funds rate. As well, given recent financial market stability, the move higher in commodity prices and better economic data, the Fed's policy statement is likely to contain somewhat more hawkish commentary than many expect. If the Fed only cuts the fed funds rate 25 basis points, however, and shifts its policy bias to neutral, investors will likely be disappointed initially and sell stocks. I don't expect this selling to last and will look to increase market exposure into any weakness. Given the current extreme pessimism for the U.S. dollar, a bounce higher in the currency is likely, which may also pressure oil. While the investment banks' earnings reports won't be pretty, for the most part, I view the lifting of uncertainty regarding this issue as a large positive. As well, many investors, both pros and the public, remain positioned quite bearishly ahead of this week's significant uncertainty, which is another big positive. The three-month Libor rate is falling another 5 basis points and has dropped 13 basis points in six trading days. As well, the JPMorgan Emerging Market Debt Index has risen 1.1% over the last five days, and the Bear Stearns High-Yield Index is 0.25% higher over that same period. I expect US stocks to trade mixed into the close from current levels as rising apprehension ahead of the FOMC announcement and Lehman Brothers(LEH) earnings report tomorrow offsets short-covering and less credit market anxiety.