Before the Fed’s announcement yesterday that interest policy was unchanged, the markets took off trying to erase the losses sustained earlier in the week.

Some resistance towards the end of the session set in (see chart), and profit taking pulled the indexes off their day’s highs.

The Fed commented that inflation is not a problem at this time since the economy is still bottoming from the recession. For the first time, the Fed also did not say that the economy is contracting, but referred to economic activity as leveling out.

Investors took that as a sign that interest rates are to stay at current levels for some time to come, most likely until next year.

Nevertheless, the major indexes have had a tremendous run, and I would expect more volatility along with some pullback become part of future market activity.

Anxiety over the outcome of the Fed meeting, coupled with fear that we may have reached an interim top in the market, kept a lid on any recovery efforts yesterday, and the markets closed down for the second day in a row.

In the bigger scheme of things, the losses were moderate and, given the recent advance, they were long overdue.

The bulls hope that this current sell off is merely a consolidation with a new rally being set up for the fall. I would not hold my breath for that to happen as this market has come a long ways based on nothing but smoke and mirrors.

Once the outcome of the Fed meeting has been published, without surprise announcements, we’ll see if the bullish crowd has enough muscle to drive the major indexes to a higher level.

Any indication by the Fed that the recovery is delayed, or that the green shoots are actually weeds, will most likely put the bears in charge.

The market tripped a little yesterday but, as has been the case lately, the bulls put up a fight after the early sell off, and the losses ended up being moderate.

On the horizon is the Fed’s decision on interest rates, which is due out on Wednesday. While no changes are expected, uneasiness nevertheless prevails. With the economy being as weak as it is, I can’t see any justification for higher rates.

Part of the uneasiness could also be the lofty levels the markets have reached. Today, the Dow Theory, the oldest timing service in the country, chimed in with a buy signal. I want to caution you, because buy signals via the Dow Theory tend to be generated very late in the cycle while sell signals often occur after sharp market corrections.

You can read more about the Dow Theory in “Dow sending Buy signals.”

Mish at Global Economic Analysis referenced an interesting article written by economist Dave Rosenberg titled “What Growth is the S&P; 500 Pricing in? Here are some highlights:

Based on past linkages between earnings trends and the pace of economic activity, believe it or not, the S&P; 500 is now de facto discounting a 4¼% real GDP growth rate for the coming year. That is what we would call a V-shaped recovery. While it is possible, though in our opinion a low-odds event, it is doubtful that the economy is going to be better than that. So we have a market that is more than fully priced for a post-recession world — any further gains would suggest that we are moving further into the “greed” trade.

The bull/bear spread widened by over 10 percentage points this week; a nightmare for the technical analyst (from a contrary perspective).

There you have it. This does not mean that stock prices can’t climb any higher but, based on Dave’s analysis, I have to wonder how much upside potential remains given the not very encouraging economic conditions.

Following the market trends, we will deal with an eventual turn-around effectively via our exit strategy. What concerns me more is that millions of investors have become complacent and think that happy days are here again. They will get caught unprepared in the upcoming trend reversal (whenever it occurs) without a plan to protect their portfolio from a repeat disaster.

There will be no post today, since various commitments are keeping me out of the office. Regular posting will resume on Monday.

Despite the recent rebound in the market place, not all is well in most 401k accounts, as MarketWatch reports in “Plenty of Reasons to Worry:”

Happy days are here again, right? After all, the markets are up, Americans are twittering happily about their 401(k) accounts, and life is good, right? Not so fast.

That’s bad, to be sure. But what’s even worse is that not enough Americans have retirement plans at work. According to Copeland’s analysis, just four in 10 families had a member participating in an employment-based retirement plan — either a traditional defined-benefit pension plan or a defined-contribution plan — from a current job. If my math is right, that means that six in 10 American workers don’t have an employer-sponsored retirement plan.

While that indeed does not sound too encouraging, it is up to each individual to ramp up their savings via a 401k and other means of setting money aside for retirement. No one else is responsible.

What concerns me more are the losses that many have experienced when the markets collapsed in 2008. Feedback from readers confirmed that many have sold their positions at steep losses and stayed out of the market because they were too afraid to jump back in to take advantage of the recent upswing.

By the time investors realize that they need to participate again, it will be too late. I hope I am wrong here, but I believe that current upside potential is very limited and grave downside risks remain setting up a potential repeat performance of last year.

This may not happen right away, but the economic outlook simply does not give me the warm fuzzies. If any future data shows that we’re not moving out of the recession, this rally will be over. I can only hope that investors have learned how to protect their portfolios when the long-term trends show that we are heading south again.