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Expectations For Rate Cut Already Built In?
NOTE: Please click on the charts below to enlarge them if they do not appear clearly.
Like the previous day, the major indices traded in a tight, sideways range ahead of today's Fed meeting. This time, however, strength in the first hour of the session enabled stocks to finish with decent gains. The S&P 500 gained 0.8%, the Dow Jones Industrial Average 0.7%, and the Nasdaq Composite 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.7% and 0.8% respectively. Most of the main stock market indexes settled just above the middle of their intraday ranges.
Not surprisingly, trading activity in both exchanges eased further. Total volume in the NYSE ticked 1% lower, while volume in the Nasdaq came in 4% lower than the previous day's level. Last Friday's turnover was already at its lightest levels since early October, but investors and traders stepped back even more yesterday. Given that yesterday's advance was clearly driven by light retail activity and little institutional trading support, it's difficult to get overly excited about the rally. Nevertheless, it's notable that stocks have not yet pulled back ahead of this afternoon's Fed meeting on economic policy.
Fed days are challenging, as the main stock market indexes often ignore key technical support and resistance levels that would otherwise be significant. When the Federal Reserve Board's announcement on economic policy is made at 2:15 pm ET today, we can expect volatile momentum to whip the market in both directions, ignoring any technical levels that traders and investors would otherwise base their decisions on. As such, it would be a moot point to look at support and resistance of the major indices until after the knee jerk reaction from today's FOMC meeting has passed.
Practically all of Wall Street is expecting at least a quarter-point reduction in the Fed Funds Rate today. However, economists are divided on whether or not the rate cut may be increased to half a point. Whenever Wall Street's expectations are varied going into a Fed meeting, the subsequent stock market reaction to the policy announcement is even more erratic and whippy. Therefore, we encourage you to have a firm plan of action for managing your positions ahead of the 2:15 pm ET announcement. Regardless of how much interest rates are lowered today, one thing is certain: the stock market's strong rally off the November lows has already built in high expectations from the Fed. Though it's not impossible, it seems unlikely the Bernanke team could say anything that drives stocks much higher without first seeing a healthy pullback from the broad market's recent gains. Further, if the Feds say anything that leaves a bad taste in the collective mouths of Wall Street, downside momentum from a sell-off could become pretty swift. This is simply because the S&P, Nasdaq, and Dow still have a lot of overhead supply to contend with from their higher prices set in October.
Finally, remember that the real reaction to Fed announcements is typically not seen until about one to three days after the meeting. Looking back at the most recent rate cut announcements, the initial afternoon reactions were quite positive, but the gains vanished only several days later. Current price action in leading stocks and the major indices remains healthy, so understand that we are not necessarily bearish on the market. Rather, just remember that Wall Street typically "buys the rumor and sells the news," meaning expectations for whatever the Fed might say is probably already built into the market's current prices. If stocks were already showing weakness ahead of today's Fed meeting, our expectation would be more positive, but that's not the situation.
Open ETF positions:
Long - PPH, SLV
Short - (none)
NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.
Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. Wagner is currently working on this third book, scheduled for publication in early 2008.
For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.
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