A hawkish pause, but don’t panic

Mid-week market update: It was a hawkish pause. The Fed’s decided to leave rates unchanged, but in the Summary of Economic Projections (SEP), it acknowledged that the economy is strong than its June projections. More importantly, the Fed Funds target for the end of this year remains unchanged, indicating that FOMC members expect another quarter-point rate hike, and raised rate expectations by a half-point for the next two years. In other words, higher for longer.


Moreover, the 2-year Treasury yield, which is a market proxy of the terminal Fed Funds rate, ended the day at 5.16%, a new cycle high.





A typical market reaction

The stock market’s reaction was fairly typical of FOMC meetings. Bespoke observed that the usual S&P 500 pattern during FOMC decision days ends with a late day sell-off.


On the weekend, I pointed out the wedge patterns being formed by the S&P 500 and the NASDAQ 100. I would add that while the major large-cap indices were forming wedges, the mid-cap S&P 400 and small=cap Russell 2000 were not in wedges but near their August lows. The dam broke today. The S&P 500 and the NASDAQ 100 broke down through wedge support, and both the S&P 400 and the Russell 2000 broke the support as defined by their August lows.


Watch out below!


Not the Apocalypse

Don’t worry, I don’t expect any pullback to be the Apocalypse. While  market internals are not oversold and sentiment is not panicked indicate further downside potential, initial S&P 500 support can be found at the August lows, or about 4350 level.

Looking ahead, the market may show further concern about the possibility of a government shutdown. As of this writing, the House hasn’t passed a Continuing Resolution to fund the U.S. government past September 30. It even failed to pass a bill to fund the military, which is unprecedented. Analysis from Yahoo Finance found that stock market returns tend to be choppy during shutdowns, but they tend to be non-events overall.


My inner trader is waiting for the point of maximum panic as an opportunity to enter the market on the long side. Be patient.