Snapshot Notes - April 30, 2008


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WEDNESDAY, APRIL 30, 2008

Fed Decision Leads to Confusion

04/30/08 3:10 PM EST

As of:

SPX 1375

HELP ARCHIVE

The news is out and stocks didn't show too much of a directional move during the first half-hour, but have dipped over the past half-hour.

There are any number of ways to look at today's reaction to the FOMC decision, and we'll look at a couple, but I don't want to get too carried away. How the market reacts to this news is important, but it's not the end-all, be-all.

I was curious about a couple of different looks at the data - how the market has acted when it hit at least a three-month high on the day of a scheduled FOMC decision, and also how it has done when at least 1000 more stocks on the NYSE were up versus down by 2:30pm, 15 minutes after the news release.

Going back to 1995, I could find 11 other cases when the S&P hit a three-month high on an FOMC day. On average, the day closed in positive territory by +0.6% and was up 9 out of the 11 times. What I find more interesting, though, is that the gains tended not to last, at least over the past six years.

Since the bear-market low in October 2002, the S&P was negative three days later 6 out of 7 times by an average of -0.4%. The average maximum gain during the three days was +0.4%, with 0 out of the 7 showing a gain of more than +1% at any point during those three days. The maximum downside averaged -1.1%.

The other look I wanted to touch on was what has happened when the at least 1000 more stocks were positive than negative at 2:30pm. From that time to the close, the S&P was positive 6 of 8 times by an average of +0.4%. The following day, though, the S&P was up only 2 of the 8 times and showed a slight average negative return (the average return was skewed higher by one instance in late January as the market was recovering from the panic conditions earlier that month).

So far we're not seeing a typical post-Fed reaction, as the indices have started to trend lower despite the early positive indications. This would violate most of the precedents I can find based on how the market reacted during the morning hours, and immediately after the FOMC decision, so we have few precedents to study if we continue to see selling pressure into the close.

That's about all the further I want to push on this data, as it's simply not the only driver of the market. Traders' attention will now quickly focus on the rest of the data looming this week, which will take on added importance given the Fed's reduction in rates and off-handed remarks about inflation. I still don't see a big edge in the short-term, though I do have a general expectation that any upside here won't be sustained, particularly if we turn and head higher into the close.

Morning Trade Could Give a Hint About the Afternoon

04/30/08 10:15 AM EST

As of:

SPX 1375

HELP ARCHIVE

Good Wednesday morning...We begin the day with a slightly positive bias to the major equity indices, and most of the broader sectors. Citigroup is getting hit fairly hard based on its dilutive intent to issue yet more stock, and that's helping to drag down financials in general.

Yesterday I touched on the tendency we see during days when the FOMC has a rate decision scheduled. We often see a moderate drift higher during the morning hours, a huge drop in volume heading into the lunch hour, two or three violent whipsaws after the announcement is released, then a more trending move into the close.

They say a picture is worth a thousand words, so let's take a look at the intraday action in the S&P 500 tracking fund (SPY) over the past two years, in 5-minute intervals, on days when the FOMC has a scheduled meeting.

First, the chart below shows the aggregate performance in SPY on all 16 days, using relative performance since the previous day's close.

The chart clearly shows a modest drift higher during the morning, a couple of whipsaws after the announcement, then more of a trend into the close. The bias has certainly been to the upside over the past couple of years.

Now let's look at only those days when the S&P had a positive reaction to the FOMC decision, as determined by whether the day's close was higher than the previous day's.

The interesting thing here is that there was a most definite positive bias during the morning, with a very steady uptrend. Immediately after the announcement, stocks sold off about -0.4% on average, then reversed strongly and rallied about 1% on average over the next 45 minutes or so before settling down into the close.

Now let's look at the days when the S&P closed in negative territory to see if the intraday pattern differs markedly from the one above.

There's clearly a marked difference here. On days when the S&P had a negative reaction, we saw a much less positive morning trade, with the S&P struggling to maintain any gains. Immediately after the announcement, we saw a quick spike higher, which was quickly sold, then there was a choppy move lower into the close.

All the charts above are averages, so of course there is some variation from day to day, but the instances were pretty consistent. That tells me that if we see a steady move higher into the announcement, then an initial negative reaction, odds are that we'll see an upside reversal of that into the close, possibly quite strong. But if stocks chop around in negative territory this morning, then spike higher after the FOMC release, I'll be expecting that spike to get sold and more selling pressure coming into towards the close.

These are just general biases, but they help to flesh out a trading plan for days when a known news event will surely impact the market, likely in a big way. I don't like to take big positions ahead of events like this, and I'm adhering to that now. I can't find any strong edge among the sentiment-, breadth- and price-based patterns I follow, so I have little justification for trying to game the reaction to the FOMC announcement. More towards today's close, we'll go over some tendencies in the days following strong reactions to the announcement, which is what we've done for the past few years. Basically, whatever move is made is more likely than not to get reversed. Initial reactions to the announcement tend to get reversed as we saw above, and so do large closing reactions.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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