Updated: 06-Nov-02
Fed Pattern
[BRIEFING.COM - Jim Schroeder] It has been nearly three and one half years since the Fed first tightened and we have subsequently watched the FOMC work through several different phases; from a restrictive bias, through a transition period, an easing phase and a nearly one year pause with the Fed waiting for the easing to have an impact on the economy. The Fed is on tap again tomorrow and is widely expected to ease for the twelfth time in this cycle. Given the often violent reaction to the moves by the Fed we will examine the price action before and after meetings or intermeeting moves to see if any patterns develop.
The History
The table below gives the date of the meeting/move and the action taken, if any, at the meeting. The next column lists the number of days of the initial move after the meeting for the Nasdaq Composite and the size in percentage terms. The final column is similar in that it gives the length and size of the move that followed the initial reaction.
Date Action Initial Move--Length from Meeting and % Change Secondary Move--Length and % Change
November 06, 2002
September 24, 2002 None 2 days +4.8% 2 days -6.3%
August 13, 2002 None 7 days +12.3% 9 days -12.3%
June 26, 2002 None 2 days +3.9% 3 days -10.0%
May 7, 2002 None 1 day +8.7% 2 days -5.7%
March 19, 2002 None 2 days -2.9% 1 day +2.6%
January 30, 2002 None 1 day -2.1% 2 day +4.9%
December 11, 2001 Ease 3 days -3.3% 2 days +3.9%
November 6, 2001 Ease 2 days +2.8% 2 days -5.6%
October 2, 2001 Ease 2 days +9.9% 1 day -6.8%
September 17, 2001 Ease 4 days -12.3% 2 days +10.0%
August 21, 2001 Ease 4 days +5.5% 14 days -28%
June 27, 2001 Ease 3 days +5.1% 6 days -11.3%
May 15, 2001 Ease 5 days +11.6% 5 days -10.8%
April 18, 2001 Ease 2 days +5.9% 3 days -9.1%
March 20, 2001 Ease 2 days -3.4% 3 days +10.3%
January 31, 2001 Ease 3 days -6.3% 1 day +4.1%
January 03, 2001 Ease 3 days -12.1% 11 days +25.8%
December 19, 2000 None 2 days -8.8% 5 days +12.6%
November 15, 2000 None 5 days -12.9% 2 days +8.8%
October 03, 2000 None 2 days +2.6% 2 days +14.0%
August 22, 2000 None 8 days +7.6% 10 days -13%
June 28, 2000 None 5 days -3.0% 7 days +12.2%
May 16, 2000 Tighten 6 days -18.1% 11 days +27%
March 21, 2000 Tighten 3 days +7.7% 7 days -28%
February 02, 2000 Tighten 7 days +10.2% 2 days -4.4%
December 21, 1999 None 8 days +7.2% 4 days -11.4%
November 16, 1999 Tighten 7 days +5.2% 3 days -4.2%
October 05, 1999 None 5 days +4.4% 4 days -9.9%
August 24, 1999 Tighten 2 days +2.4% 3 days -5.2%
June 30, 1999 Tighten 11 days +6.9% 5 days -8.8%
The Phases
The first phase was eight meetings long and encompassed six tightenings. Despite the fact that the Fed was putting the clamps on the economy, the Nasdaq Comp initially rose after the first seven meetings. The second phase was five meetings long and could be considered a transition period with the index sliding during three out of the five initial periods. Next was the easing phase with the Fed cutting rates eleven times during 2001. Despite the fact that the Fed was looking to stimulate the economy and on three occasions cut rates between scheduled meetings, five times the initial reaction was negative. The year long pause that is expected to come to an end tomorrow, has seen the last four followed by a positive reaction.
Patterns
Unfortunately, these results show that it is not as simple as tightening being negative and easing positive. A number of factors go into the equation from economic data and earnings to the perception of whether the Fed is on the right course and the bias of the market headed into the meeting/move.
What has developed the most consistently is that the initial reaction after the meeting has generally not proven sustainable whether up or down regardless of the outcome of the meeting. In fact, the secondary moves exceeded the size of the first move on a percentage basis 70% of the time.
As for other patterns of possible interest, the direction of the initial reaction after the meeting matched up with the pre-meeting bias 66% of the time. As for the overall market bias once the secondary move was completed, it was the same as the pre-meeting bias 63% of the time.
Conclusion
These are merely patterns that have developed in the past and will not necessarily following tomorrow's meeting. However, it does present an outline that the market has followed and thus presents a possible opportunity to profit. If this pattern follows, the market will embark on a short term move, likely 2 to 4 days that will be followed by a larger percentage move with the market resuming the pre-meeting bias (positive) thereafter. |
