Over the last two days the S&P 500 has dropped over 2.75%. I looked back to 1982 to find other times where the market has dropped at least 2.75% in the two days leading up to a Fed meeting. I found six other occurrences. They were 11/16/82, 7/8/86, 3/30/87, 8/19/91, 1/29/02 and 5/6/02. In 5 of 6 cases the market rallied on the day of the meeting. The Fed generally managed not to make things worse. The average gain the day of the Fed meeting was 1.0%. The lone loss was only 0.3%. Looking out 2 days all six were positive and the average gain was 2.3%.
So if we get the “average” 1% gain tomorrow, then what? Unfortunately, Fed-day rallies have a tendency to be short-lived. Again looking back to 1982 I looked at buying at the close of any day there was a Fed meeting and the market finished up 1% or more. As you can see by the table below, after two days there is a negative expected value. Going out two weeks it generally gets progressively worse.
The market is oversold on a price basis. The VIX is spiking. The Put/Call ratios continue to put up overly bearish readings, and the Fed is meeting tomorrow. All these things suggest a bounce. Unfortunately, the last two days look rather ordinary on a chart. There was no washout or accelerated move lower. This calls into doubt the possibility that today could serve as a bottom should the Fed along with the positives mentioned above spark a rally over the next day or two. Right now a reasonable roadmap to keep in mind might be a short, oversold bounce followed by another leg lower. I’ll continue to re-evaluate as the next few days unfold, though.
P.S. While some readers may prefer a shot of Princess Leia in the golden bikini to the picture posted above, gold closing over $1,000/oz today meant I simply couldn’t afford it.