S&P 500 Poised for Resolution on Fed Day

Tomorrow the Federal Open Market Committee (FOMC) will release its statement from its most recent meeting followed by a press conference from Fed Chair Janet Yellen. Currently the market is not expecting a hike from the Fed tomorrow, however, there could be a hint that raises the probability of a rate hike at the December meeting.

Fed announcement days have a resoundingly bullish bias with ~35% of the S&P 500’s gains since 1995 coming on days in which the FOMC has released a policy meeting statement (via Bespoke):

 

fed_days

This tendency adds to an increasingly intriguing backdrop heading into tomorrow’s trading session; retail investors have pulled a record amount from equity mutual funds and ETFs thus far in 2016:

 

retail_withdrawing_money

This can be partially explained by baby boomers making portfolio adjustments and withdrawals for retirement purposes, but it is still notable given that the market has still managed to perform reasonably well while clawing out marginal all-time highs.

Meanwhile, the market’s tendency to rally on Fed days will be fully tested by, what is in my interpretation, a bearish technical picture:

 

SPY (Daily)

spy_daily_9-20-2016_001

Since suffering a high volume drubbing on September 9th the S&P 500 has spent the last seven trading sessions oscillating within a relatively volatile (certainly volatile relative to August) trading range. Volume has declined since the big drop on September 9th, and it has dropped off noticeably in the last two trading sessions as traders await the Fed. Meanwhile, relative strength (RSI-14 at top) has remained submerged in bearish territory below the median line as the VIX has bull flagged in the mid-teens.

Simply stated the recent consolidation has a distinct flavor of a bearish consolidation before equities embark on their next leg lower. However, the Fed has a magic touch as evidenced by the above statistic. While it’s hard to have a strong opinion entering a Fed announcement I can say for certain that if equities decline tomorrow it will be a bearish red flag laid on top of an already tenuous market backdrop. Stay tuned and get your popcorn ready…

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