Where is the market headed? Watch these two things

With major indexes off their August lows, there is some optimism in the market, though others say the worst is yet to come. So, where do we go from here? There are two major events to watch out for in the weeks ahead that will determine which way we're headed.

The first is the beginning of the quarterly confessional. The four times a year that public companies of all sizes report their "state of affairs," detailing the results from the prior three months, while also offering up guidance for the next six months. This is always a skittish time.

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

The second is the market's obsession with the Federal Reserve as traders, investors and even automated risk-management software programs place their bets on when and what the Fed will do next.

My sense is that earnings will NOT disappoint to the extent that analysts have been screaming about. China, the big elephant in the room, may not, in fact, be so big after all. Sure, some sectors of the economy will be impacted by a slowing China, while other sectors will do just fine.

Case in point: Caterpillar slashed its earnings forecast last week, making it the 16th straight quarterly disappointment. They went out on a limb, like always, and blamed the stronger dollar and weaker emerging markets including the elephant, China. And the stock plunged, which begs the question: 16 straight quarters of disappointments? Really? Maybe the issue is management and not the global economy. Yet Apple, Pepsi and Nike have reported a far different story. China has not only surprised to the upside but the outlook continues to be fairly robust.

Officially earnings will kick off next Tuesday but the rally of the past week suggests that investors and traders are becoming less concerned about what those earnings will show. I suspect that, in the end, we will get the usual 75 percent of companies that beat expectations. (Recognizing the fact that the bar is very low.)

There's another elephant in the room, the Fed, which has left hardly any room to stand! I expect that the Fed will stay in this holding pattern until next year. It no longer appears that the Fed will be able to move on rates this year and I think both the stock and bond markets agree. Washington is in turmoil: The speaker of the house quit, the right wing of the GOP is throwing a hissy fit over the debt ceiling and the government could wind up shutting down on Dec. 11, one week before the Fed's final meeting of the year!

Continued concerns over global growth and the coming presidential election year appear now to handcuff the Fed. I think stocks are set up for another year-end rally but I don't think we're headed for new highs – just higher, leaving us well within the upper trading range of the year (S&P 500: 2075 to 2125).

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.