Editor's Note: Combining his passions for the markets, humor and food, "What's cookin' with Kenny Polcari" is a blog published twice weekly on CNBC.com. With more than 30 years of experience on Wall Street, Polcari provides insight and analysis on the markets, as well as a recipe du jour. Buon appetito!
The saga known as the Federal Open Market Committee meeting begins today and runs through tomorrow. All the speculation for the past five months that this is the meeting that so many assume will be the beginning of the end for quantitative easing—or will it?
Monday's stock market action would indicate otherwise. With the withdrawal of former Treasury Secretary Larry Summers as a candidate for chairman of the Federal Reserve, investors around the world are betting that if President Barack Obama nominates Fed Vice Chair Janet Yellen, her monetary policy will remain more accommodative.
(Read more: Is Yellen a sure thing at Fed? Maybe...maybe not)
After all, stocks spiked on news that Summers is no longer vying to lead the Fed, leading Wall Street to wonder whether this was a "Summers dropout rally" or a "Yellen all in rally"? Was it real buying or the shorts that ran for cover, as they had been betting against this market for a bit?
I would suggest it was both—new money forcing the shorts to pay higher and higher prices. The message: Do not fight the Fed!
All this fawning over Yellen has likely caused her to blush—you know, turning pink, which makes for the perfect dish: pasta and pink sauce (but more on that later).
Stocks continued to rally Tuesday, as the Fed statement will be keenly watched amid expectations of a $10 billion reduction in Treasury purchases, leaving mortgage purchases at current levels to continue to support housing. Uncle Benny is trying to convince the markets that any tapering does not equate to tightening of credit.
Hmmm. That is not the message being heard by the market. Any talk of a reduction in purchases has caused bonds to come under pressure and yields to go higher. This is the dilemma that the Fed now faces. The jump in the long end of the curve has already affected housing and, as we found out last week, is causing thousands of layoffs at Bank of America, Wells Fargo and JPMorgan Chase.
That's exactly the opposite of what the Fed intended. Higher borrowing costs caused new-home sales to plummet by 13 percent in July while mortgage applications continue to fall, forcing some analysts and strategists to cut back on the amount of tapering ($20 billion to $10 billion) that they had anticipated, while others do not expect any move at all.
(Read more: Market sees $15 billion Fed taper soon: CNBC survey)
Last week we learned that retail sales slowed considerably in August, and early forecasts for the Christmas shopping season are already weak. Many expect it to be the worst since 2009, causing retailers to offer deep discounts early in the season, which by all accounts has already begun. Some will say that it is way too early to make such a prediction, but it is not just pie in the sky.
Just consider the weak retail sales report last week, anemic back-to-school results, Walmart Stores and Macy's warning on forward guidance, KMart already promoting its layaway service and Toys "R" Us offering 20 percent off to shoppers who visit (and buy) before Sept. 21.
The kicker—those Jos. A. Bank commercials that advertise a promotion something along the lines of buy one suit, get four free. So do they count it as one sale, or five sales for reporting purposes? I'm just sayin' ...
The euphoria from Monday's market has faded a bit. Global markets giving back some of the gains as investors realize that the picture remains cloudy while they await news from the Fed. Expectations around the world are for a reduction in purchases. I still don't see how they will justify it based on the metrics outlined by Bernanke that are nowhere near being met, but if they talk about it enough, the hope is that markets will get used to the idea.
The concern will be how he positions it. Will he leave the door open to 'turn the spigot' on again in the event of a substantial slowing? If he does, would it undermine the Fed's credibility? Will it send the message to investors that "it ain't all coming up roses?"
(Read more: 'Out of control' Fed should be abolished: McNealy)
As much as the market moved higher over the past two weeks, you can feel the edge of nervousness—and yet no one wants to be the first one out the door. The Dow and S&P are now testing resistance at the all-time highs, but they also have become a bit overextended relative to their 200-day moving average and with a debt ceiling confrontation and Fed action on the horizon.
A correction back to 1,625 not only would be healthy but would set us up for the next move higher as investors adjust their long-term outlook. And a Yellen appointment will only serve to give investors the comfort level they need.