Editors note: Originally published September 15, 2015 - madhedgefundtrader.com
The Coming Market Reaction to the Fed Decision
Up, then down, then up again.
How about that?
Will the Federal Reserve reverse their nine-year interest rate-cutting trend, or does it have another three months of life?
Is global economic weakness, or the approach of US full employment first and foremost in the mind of my friend, Federal Reserve governor Janet Yellen?
I'm sure that two days before the meeting, even the Fed itself doesn't know the answer to these burning questions.
That has been the wellspring of the tremendous volatility we have grievously suffered for the past month that had the Volatility Index (VIX) at one point tickle a twice a decade high 53% level.
But could we be focusing on the wrong thing?
Is the Fed decision a simple matter of smoke and mirrors distracting us from the real market driver?
That would be the calendar.
After all the pundits predicted that the "Sell in May, and go away" effect was utterly useless, backward looking, and little more than popular folklore, it then performed like a star.
I was certain this would be the case, and warned readers in the spring we would see a "Sell in May, and go away" with a turbocharger, racing tires, and fuel injection.
This is why almost every S&P 500 Trade Alert I shot out since April was from the short side. My strategy thankfully delivered windfall profits for believing followers.
The problem is we may be trying to overthink the markets.
The May peak, and the 15% swoon that followed could be simply no more than further proof of the 60 year seasonal preference to sell stocks in the Spring and buy them back in the Fall.
Global growth fears, the China slowdown, stock market crash, and currency devaluation, the European refugee crisis, ISIS, the commodity collapse, saber rattling from Russia, and even share price valuations all could be nothing more than simple noise.
If I am right, then the Thursday Fed decision will be absolutely of no consequence. Whether they raise ¼% and follow it up with ultra dovish talk will have no impact of the profitability of US companies whatsoever, except financials.
As we mathematicians like to say, "it is close enough to zero to still be zero."
The mere fact that the Fed decision is out of the way is the really important thing.
I have always believed that making money in the stock market is all about anticipating what is going to happen next.
What happens after a China crash? A China recovery.
European chaos? European stability.
An ISIS victory? An ISIS defeat.
A commodity collapse? A commodity bull market.
Russian saber rattling? Russian peace overtures.
Concern about share valuations? A return to momentum investing.
It all adds up to a global synchronized economic recovery sometime in 2016.
When do stocks start discounting this? How about right now!
You better pay attention to me, because I have been dead on right about how the stock market would play out after the August 24 flash crash.
That was my expectation of a narrowing triangle of higher lows and lower highs that reaches an apex exactly on Thursday, September 27 at 2:00 PM EDT.
After a false breakdown, the risk is we may get a stock melt up once the Fed announcement is out. It could kick off the six months a year we usually get seasonal strength for equities.
And this time, the follow up discussion will be far more important than the initial, algorithm driving headline.
Don't get me wrong. We haven't suddenly gotten a free pass on market turmoil.
Volatility is not about to plummet back to 10% and then sit there for four more years. We still have October to get through, which has a notorious reputation for ruining people's lives and wealth.
However, my prediction for new all time high in American stock markets by the end of 2015 still stands.
Make your bets, and place your chips on the table please.
It's Really All About the Calendar