Fed Days And Intermediate-Term Highs

Tomorrow is a Fed Day. As I have discussed many times, Fed Days generally carry an upside tendency. But this tendency is greatly impacted by certain variables. A large collection of these variables may be found here on the blog under the “Fed Day”label. And many more may be found in the “Quantifiable Edges Guide to Fed Days”.

One variable I showed about a year ago was whether the market was already at an intermediate-term high. There is a decent chance the market closes at a new high today so I've decided to update that study.

First, let’s take a look at SPX performance on Fed Days when the SPX has NOT closed at a 20-day high the day before.

That’s nearly 32  years of bullishness.

But now let’s see performance at times when the SPX did close at a 20-day high the day before.

No consistency and no pronounced edge in this sample of 41 instances.

Traders looking to play for a short-term Fed Day bump should perhaps be hoping the SPX does not close at a new high today.

Also, for related research with regards to the overnight,  be sure to check out this post at OvernightEdges.

An Updated Look At Fed Rallies To New Long-Term Highs

In “The Quantifiable Edges Guide to Fed Days” I discussed Fed Days that close at new highs.  The basic finding was that when the market closed at a short-term high on a Fed Day, then it was likely to pull back over the next few days.  But when it closed at a long-term high, then the rally was likely to continue.  Below is a study from the Guide that last appeared in the 9/14/12 blog.

This suggests further upside is likely over the next 1-2 weeks.

A Fed Day Setup That Has Seen SPX Higher 3 Days Later Every Time Since 1982

Tuesday’s decline was the 3rd down day in a row.  Many people are now aware that Fed Days have historically had a bullish tilt.  So 3-day selloffs leading up to Fed Days have been quite rare.  But they have also been a very bullish setup.  The table below shows the hypothetical results of buying at the close on the day before a Fed Day if it was at least the 3rd consecutive lower close.  The exit is 3 days later.

All of the 15 instances saw the market higher 3 days later.  These are some very encouraging numbers for the bulls.  I do have a concern here.  There has only been 1 instance in nearly 15 years.  And that took place in 2005.  The setup has certainly been potent over a long period of time.  But I am much less enthused about it than I would be if all these instances would have taken place over the last 10 years.  Still, with an undefeated record I think it is worth consideration.

An Updated Look At Intermediate-Term Highs Just Before A Fed Day

Today is a Fed Day. As I have discussed many times, Fed Days generally carry an upside tendency. But this tendency is greatly impacted by certain variables. A large collection of these variables may be found here on the blog under the “Fed Day”label. And many more may be found in the “Quantifiable Edges Guide to Fed Days”.

One variable I showed in September was whether the market was already at an intermediate-term high. Today I decided to updated that study.  This time I elected to show a stats table instead of the profit curve I showed in September.

No matter how you look at it, the intermediate-term high appears to take away the edge.

When Fed Days Close at Intermediate-Term Lows

In last night’s letter I examined 20-day lows that occur on Fed Days during long-term uptrends. The results appeared interesting. You'll find the stats table below.

Over the first 1-4 day period there doesn't appear to be much of an edge. But over the 5-10 day period the market has reliably risen. Instances are low, but I still thought the two-week results were strong enough to keep in mind and give some consideration.

When The Fed Sparks A Rally To A Long-Term High

In “The Quantifiable Edges Guide to Fed Days” I discussed Fed Days that close at new highs.  The basic finding was that when the market closed at a short-term high on a Fed Day, then it was likely to pull back over the next few days.  But when it closed at a long-term high, then the rally was likely to continue.  Below is a study from the guide that.  I’ve updated all the stats.

This suggests further upside is likely over the next 1-2 weeks.

The Impact of Intermediate-Term Highs on Fed Day Performance

Tomorrow is a Fed Day. As I have discussed many times, Fed Days generally carry an upside tendency. But this tendency is greatly impacted by certain variables. A large collection of these variables may be found here on the blog under the “Fed Day”label. And many more may be found in the “Quantifiable Edges Guide to Fed Days”.

One variable I showed in January was whether the market was already at an intermediate-term high. There is a decent chance the market closes at a new high today so I've decided to update that study.

First, let’s take a look at SPX performance on Fed Days when the SPX has NOT closed at a 20-day high the day before.

That’s basically 30 ½  years of bullishness.

But now let’s see performance at times when the SPX did close at a 20-day high the day before.

No consistency and no pronounced edge in this sample of 37 instances.

Traders looking to play for a short-term Fed Day bump should perhaps be hoping the SPX does not close at a new high today.

Also, for more updated Fed Day research be sure to check out today's Overnight Overview at Overnight Edges.

Fed Days on the 1st of the Month

As I mentioned last night, Wednesday is a Fed Day. Fed Days have historically had a bullish inclination. Of course Wednesday is also the first trading day of August. I’ve documented numerous times that since the late 80s the first trading day of the month has had a bullish tendency. So I wondered how the market has performed on days that a Fed Day has coincided with the first trading day of month. There have only been six instances since the late 80s. I've listed them all below.

Early indications suggest a possible upside edge, but really we have too few instances to draw any conclusions without overwhelmingly lopsided results. Still, I thought this was interesting enough to share.

When VIX is at an Intermediate-Term Low Right Before a Fed Day

The study below is one I mentioned on Twitter (http://twitter.com/qerob) yesterday. Often leading up to a Fed Day the VIX will rise as traders fret over what the Fed might say or do. Monday was one of those rare occasions where VIX closed at an intermediate-term low on the day before a Fed Day. Below are results of the 16 other times this has occurred.

The average trade posted a loss of 0.05% - nearly breakeven. And the average run-up and average drawdown were both close to 0.7%. We know Fed Days have provided an upside edge over the years, but when the VIX has closed at an intermediate-term low, no edge has been apparent.

When SPX Closes Just Under a 50-day High Prior to a Fed Day

Yesterday I showed that Fed Days typically carry a bullish edge, but that edge failed to hold when the SPX closed at a 20-day high just prior to the Fed Day. By closing down 0.1% Tuesday the SPX narrowly missed closing at a 20-day high. So are we now safe because the market just missed a new high by 0.1% on Tuesday? Last night I suspected not. And so I ran the below test. Since we are near a 50-day high I used that as the filter rather than a 20-day high. I looked at times where the SPX did NOT close at a 50-day high, but in fact closed less than 0.5% below it. So although it is not a new high, the environment still appears positive. Let’s look at the results.

Twenty-five instances and the result is nearly dead-even. This is very similar to what we saw with yesterday’s study. I’m not viewing today as a typical strongly-bullish Fed Day.

Intermediate-Term Highs Prior to Fed Days

Wednesday is a Fed Day.  As I have discussed many times, Fed Days generally carry an upside tendency.  But this tendency is greatly impacted by certain variables.  A large collection of these variables may be found here on the blog under the “Fed Day”label.  And many more may be found in the “Quantifiable Edges Guide to Fed Days”.

One variable I briefly discussed in the 11/3/10 blog was whether the market was already at an intermediate-term high.  Today I thought I would illustrate that study graphically.

First, let’s take an updated look at SPX performance on Fed Days when the SPX has NOT closed at a 20-day high the day before.

That’s basically 30 years of bullishness.

But now let’s see performance at times when the SPX did close at a 20-day high the day before.

No consistency and no pronounced edge in this sample of 36 instances.

Traders looking to play for a short-term Fed Day bump should be hoping the SPX does not close up and at a new high again today.

When BKX Drops Hard The Day Before A Fed Day

One sector that is especially sensitive to Fed Days is the banking sector (BKX). BKX closed down on Monday about 2.5%. The study below looks at drops of 2% or more on the day before a Fed Day, and how the BKX responded on the Fed Day.

Instances are a little low here but the stats are overwhelming. Below I have listed all instances.

Not shown in all the above stats is that the average run-up was 4.2% and the average drawdown just -0.6% during the Fed Day. Overall risk/reward appears strongly favorable for BKX based on the limited sample size.

Fed Days After Large Drops

While Fed Days have historically provided an upside edge, that edge has been substantially more powerful when there has been strong selling the day before. The last time I showed this study on the blog was 4/28/10. I've updated the statistics below.

Instances are a bit low, but they couldn’t get much more bullish. With a profit factor over 11 and the average trade about as positive as the worst trade was negative, risk/reward appears to heavily favor the bulls.

With the makret gapping up large this morning it may be too late to take advantage of this one. I did send a Tweet yesterday afternoon linking to the Fed Day studies where astute readers would have found this study posted in April of 2010. If you would like to follow me on Twitter you may do so at http://twitter.com/qerob

Fed Days During the Weakest Week

Yesterday I mentioned that the week post op-ex in September has historically been the worst week of the year for stocks. I also showed a chart. Later a reader sent the following comment, “Thanks for this Rob, I'm enjoying going through your FED Days book. Seeing as we're in a week with an FOMC meeting, which you show has historically strong performance prior to the meeting does this study include the FED days effect?”

For those who may not be aware, Fed Days have had a strong bullish tendency over the years, but as I mentioned last night, this has historically been the most bearish week of the year. Below I have listed all Fed Days that have fallen during this week in September.

There have only been 11 instances, and I don't see a substantial edge in either direction. Returns are lower than with a typical Fed Day, but not so much that it will change my approach. So rather than worrying about the week, I will apply some of the other filters I’ve used before when considering Fed Day edges.

Several Fed Day edges may be found using the Fed Study label on the blog.

A more comprehensive look is available in The Quantifiable Edges Guide to Fed Days.

Fed Days With The Market At An Intermediate-Term High

Fed Days have generally exhibited an upside bias for about 30 years.  Many times this has been thanks to the Fed giving a confidence boost to a struggling market.  But what of those times where the market is already at an intermediate-term high.  With the SPX closing at a new rally high yesterday this is the situation the market is now in.  Below is a study that take a look.

What I see here is that there has been no tendency for the market to advance under these circumstances.  There could even be a slight downside edge, but the numbers aren’t compelling enough for me to bank on that.  I’d simply view it as neutral. 

Declines On & After Fed Days

Historically Fed Days have generally had an upside bias. Often when the market closes down on a Fed Day it will bounce soon after. This week we have seen a down Fed Day (Tuesday) followed by 2 more days of selling. I looked at this situation in last night's subscriber letter.



While instances are low, there appears to be a decent upside edge. This is especially true on day 1. I discussed some more details in the letter. Those that wish to take a free trial may do so at any time. Here is a link to the free trial. Those who are already registered but would like to do so again may simply send me an email. As long as it has been 6 months since your last trial, you are all set.

Predicting Fed Rates

A good question a reader sent to me yesterday was to explain how futures or options may be used to predict Fed rates. A great source to gain a better understanding of this subject is the Cleveland Fed's website. The link below is to their FAQ's page:

http://www.clevelandfed.org/research/data/fedfunds/faq.cfm

Questions 4 and 8 deal directly with this topic. Copy and pasting the information found there is a bit difficult since they use tables in the description. Should you have interest in how it is all done, simply click the above link and read the answers to questions 4 and 8.

Of course gaining a better understanding of how futures may be used to gauge expectations doesn't mean you want to actually do the calculations. Fortunately, they do them for you. The link below is updated daily and shows estimates for meeting outcomes.

http://www.clevelandfed.org/research/data/fedfunds/

Currently the estimates are suggesting there is virtually no chance of a rate increase tomorrow.

Of course even if you know what the Fed is going to do with rates, that doesn't tell you any probabilities or edges related to market reaction and behavior on or around these meetings. For that information, you'll need to read "The Quantifiable Edges Guide to Fed Days". The next Fed Day is tomorrow, June 23rd. The guide is available in ebook or paperback. If you would prefer the paperback, but want to read it tonight, just email your purchase receipt before tomorrow's meeting and I'll send you the ebook version.


Edit: Jeff Pietsch of Market Rewind in the comments section provided a link to a tool from the CME that predicts rates. Below is a lnk to the tool:

http://www.cmegroup.com/trading/interest-rates/fed-funds.html

Strong Drops Just Before A Fed Day

Likely partially due to the fact that Fed Days have generally been positive, strong selloffs the day before have been uncommon. One study I ran last night looks at other times the SPX sold off at least 1% on the day before a Fed Day. The general results are below. It should be noted that I only looked at scheduled Fed Days. Unscheduled/surprise meetings were not included in the results.



These would seem to strongly favor a bounce on Wednesday. In last night's Letter I included all the individual instances along with some additional discussion.

Poor Closes Going Into A Fed Day

Wednesday is a Fed Day. I’ve written a lot about Fed Days and they’ve historically shown a positive bias. Despite this bias they represent an event that is often anticipated with some anxiety by market participants. This anxiety is natural as participants await potentially market-moving news. What’s interesting is that those times where anxiety is the highest have typically proven much more profitable. To demonstrate this I examined where the SPY closed within its daily range. I used SPY rather than SPX for this test because the daily range is typically more accurate with the ETF thanks to the staggered market opening. Below are all times like Tuesday where the SPY closed in the bottom 25% of its daily range prior to a Fed Day.

Stats here are strongly bullish. Last night’s Subscriber Letter examined the results in even more detail. It also showed what happens when SPY closes in the TOP 25% of its daily range on the day before a Fed Day. You may sign up for a free trial subscription by clicking here if you’d like access to that report.

You may also check the Fed Day label to see previous blog posts about Fed Days.

BKX Drops Ahead of the Fed

The banks got hit hard on Tuesday with the BKX falling nearly 3%. Below are results of the last 10 times the BKX dropped on the day before a Fed Day. Gains of 5% or more are highlighted in yellow.