No Fed Taper….So Now What?

This past week has been interesting. First we had the market almost guaranteeing get Larry Summers as the next Fed Chairman, I wasn’t convinced and thought Obama would be forced to take a ‘pass’ on Summers. We then got his withdrawal from being considered from the position. We saw a positive market reaction (kind of feel bad for the guy, seeing stocks rally that hard on him not getting a job) as the market assumed it dodged the bullet of the more hawkish candidate leaving the stage.

Next up we had the must-watch FOMC announcement. Again the market was all but convinced we would see a Fed taper. I pounded the table on twitter that it wouldn’t happen. Bernanke had done everything he could to increase Fed transparency and if we had gotten the taper this month then it would have been directly in the face of all he had been working to accomplish. Many money managers were likely betting on a bearish market reaction in equities which I would say is why we didn’t see the whipsaw intraday yesterday like we normally do on Fed days. Instead equities turned higher and didn’t look back until slightly giving back a few points in the last hour of trading.

So where do we go from here?

SentimenTrader put out a great piece this morning looking at past instances of the S&P 500 ($SPX) hitting a new 52-week high following an FOMC announcement. The chart Jason Gopfert shows is below, as you can see it’s slightly short-term bearish.

Jason goes on to look at the data going back to 1996 when the S&P put in a gain of at least 0.5% on FOMC announcement days before putting in a new high. Here’s what he found:

The table below [not shown] highlights the 9 other times since 1996 that the S&P 500 futures managed to gain at least 0.5% on a FOMC decision day, settling at a new 52-week high as well.

Looking at returns over the next 50 days (not shown in the table), there was only one positive occurrence, and that was just barely.

There were 6 times that the futures had gained more than 1% on the day, as happened on Wednesday.  50 days after those occurrences, the futures were negative every time, and all by at least -2.0%.  Its average return 50 days later was -3.9%, with a maximum gain at the best point averaging +3.2% and a maximum loss averaging -8.0%.

This matches up with what I’m seeing as well. With yesterday’s move higher in equities some of the mean-reversion metrics I follow flipped negative, indicating we could see some weakness in the coming days. It wouldn’t be a huge surprise to see some profit taking at these lofty levels, however I think there could still be room to run going into the end of the year – sans any debt ceiling fiasco out of D.C. We’ll see what price action tells us and be prepared to swing at whatever the market pitches.

Source: Daily Sentiment Report (SentimenTrader)
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