Cutting through the noise: Why today’s Fed decision doesn’t matter

Mid-week market update: It’s always difficult to make a stock market comment on FOMC announcement day. Equity prices can exhibit strong reversals after the announcement and press conference. As well, it’s also not unusual for the move to reverse itself the next day.

It’s not clear whether the 2023 FOMC pattern of weakness into the meeting and a rally afterward will appear again, mainly because the market had been rallying into the July meeting, which is a different pattern than all of the other meetings this year.



I am very conflicted about the short-term direction of stock prices.



The bull and bear cases

You can tell a lot about the character of a market by the way it reacts to the news. Let’s begin with the reaction to Q2 earnings season. As of last night, 116 of the companies in the S&P 500 have reported. The EPS beat rate was 74% (5-year average of 79%) and the sales beat rate was 65% (5-year average 69%). 


While results have been below average, last night’s market reaction was unusual. Both MSFT and GOOG, which are two heavyweights that comprise an aggregate of 9.6% of S&P 500 index weight, missed on both the top and bottom line. Instead of skidding in the after hours, both stocks rallied. Market strength in the face of bad news should be bullish.


On the other hand, the usually reliable S&P 500 Intermediate Breadth Oscillator (ITBM) is overbought on its 14-day RSI. Market weakness that pushes RSI into neutral is a sell signal, which has been correct about two-thirds of the time.



The NYSE McClellan Oscillator (NYMO) and the NASDAQ McClellan Oscillator (NASI) have already recycled from overbought conditions, which is a warning signal.



You see why I am conflicted. There’s a better way to cut through the noise.



Peak inflation

It’s FOMC day and all eyes are on inflation and Fed policy. Inflation isn’t just a US problem, it’s global and global central bankers are tightening monetary policy in response.



The good news is inflation pressures appear to be peaking. Inflation surprise is flat to down in most major countries except for Canada.



The narrative is turning from the fear of rising rates to recession. /Tomorrow’s GDP print is expected to be negative, and the cacophony of calls for a recession has already begun based on two consecutive quarters of negative GDP growth. Recession has become such a consensus call that Jim Cramer did a CNBC show on the three flavors of recession. 


Indeed, the commodity markets are signaling a downturn. Historically, the cyclically sensitive copper/gold ratio has been strongly correlated to the 10-year Treasury yield. The copper/gold ratio is falling, which should put downward pressure on yields.



Tactically, the 10-year Treasury yield is tracing out a possible head and shoulders top, with the chartist’s caveat that H&S patterns are incomplete until the neckline breaks.



Instead of trying to guess the direction of the stock market, a better way of cutting through the noise is a commitment to the Treasury market. The longer the maturity, the better.



Disclosure: Long ZROZ


27 thoughts on “Cutting through the noise: Why today’s Fed decision doesn’t matter

  1. Expect we could challenge June top of about 4,150 before major reversal down on recession fears. I concur long duration fixed income is attractive and very oversold and have been accumulating over the past few weeks.

  2. A day later, and commodity prices have kicked up, together with breadth and NYMO. My question is, is the timing now such that the market is beginning to see past the recession to the light at the end of the tunnel? Is the light really so sharp?

  3. “I am very conflicted about the short-term direction of stock prices”.
    Transmission of information seems very rapid through the economy, more so than in the past. So the markets are pre-empting a rate cut, or so it seems by profitable tech companies. Some degree of recency bias appears to be in play here, with profitable tech stocks being purchased as being “cheap” based on historic valuations, pushing the index complex higher.
    Significant money on the sidelines waiting to be invested may be another factor.
    Bear market rallies are sharp and steep. So far it has been 4 rallies of 10%; one expects a few rallies of 15-20% also.

    1. Why the immediate flip? I swung for the fences on what I perceived to be a Fed pivot (which after sleeping on it may in fact be nothing) and went all-in. So a one-day gain of ~+0.7% seems worth locking in.

  4. After the Kennedy slide in 1962 which is a remarkable analogue in seasonality and dimension as the bear market of 2022, after it ended in June 29 of 1962, the Fed began to raise rate from 1.7 to 5.7 by 1965.

    What do you think the market reaction was? A gain of 75% over that period, 1962 to 1965 over 150 weeks. Just because you haven’t seen it, doesn’t mean it can’t happen.

    This market recovery of 2022 appears to be unstoppable at this point even as the volume drops, which often suggests either the recession is over or interest rate doesn’t matter as in 1962 to 1965. There are several periods in history that this has occurred. All my short models have been stopped out and the easy money is to go long intraday or ST swing buys at this point.

    1. Seasonality is not favorable for a bullish August and September in a mid term election year, but this rally is reminiscent of the July-August rally of 2020 after the Mar 2020 pandemic low. The low volume of a summer rally makes shorts untenable and the bulls were able to rally unchallenged until early Sept 2020.

      Sometimes a summation series of traders taking intraday opening and closing sides such as the ‘Smart Money Flow Index’ can be useful in seeing how the rally is being extended. See a free live chart example here where you can see the unusual near parabolic rise of SMF (bottom). Whether this is truly ‘smart money’ at work is debatable but nonetheless it is moving the markets :

  5. I still think the pain trade is higher – but I don’t have the guts to play it. The market feels ST overbought, and we’re still likely in a bear market.

    Just six weeks ago the portfolio was ~-5% and I was hoping for a +10-15% move by December. The fact that a +10% gain occurred in six weeks is a gift and I’m not one to look a gift horse in the mouth.

  6. Opening/reopening a couple of positions that look attractive in the premarket session->BABA and

      1. Closes ~117.4x. I’ve seen these kinds of moves before prior to a real breakout. We’ll find out next week.


    I hate to say it, but while skimming through Hulbert’s article his argument(s) began to resonate – it has the ring of truth. Most investors are absolutely unprepared to contemplate a severe bear market but that may be exactly where we’re headed. There are countless ways to convince ourselves otherwise all the way down. I remember well the daily grind of the 2008/09 bear – the hopes and fears that gripped the participants of the relatively few blog communities back then.

    Everyone’s looking for a second-half rally. Which may mean a slow grind down instead. Is your portfolio down let’s say -15% ytd? That may at some point look pretty damned good – it’s all relative.

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