Can Stock Market Reaction To Fed Days Tell You Anything?

| About: SPDR S&P (SPY)

Summary

We look back through 2011 comparing reaction on Fed days to market follow through.

We were surprised what we found.

What do you think it should be?

Traders make the WRONG move on Fed day?

Hypothesis: Fed days can tell you something.

Conclusion: Not really, and if anything it's opposite.

Traders' Reaction To Fed Day Wrong 62% Of The Time

We were surprised to find that the market reactions to Fed days show people actually traded the S&P 500 (NYSEARCA:SPY) in the WRONG direction. Over the next month the market traded opposite the Fed day's reaction 62% of the time. Our sample set is almost large enough for significance but 62%, for us, is not enough to bank on but it helps.

If it were 70-80% we'd get excited, so we're not changing anything based on our findings, but it's worth knowing.

The next week after Fed day also typically went opposite Fed day's direction 56% of the time.

Here's the numbers.

We looked at the last 45 Fed days. Out of 45 times the Fed day only predicted the next month 17 times. (You can do this exercise yourself by getting the dates here and the prices here but we show you detailed results way at the bottom of this report).

38% of the Fed days predicted the next month's performance. That also means 62% of the time it did not. Said another way, generally, trader reaction was wrong on Fed day.

Trader's Fed Day Reactions Wrong Versus The Next Week

The Fed day also did not predict the next week. 56% of the time trader reaction was wrong when compared to directional performance over the next week.

Look Out Bears...BUT... When Fed day is down, Traders are wrong 90% of the time.

We looked back at the 45 days. When the market on Fed day is down, the next month only followed through 10% of the time in the same direction. That means 90% of the time it did not. Traders were wrong 90% of the time if Fed day was down.

A big caveat though is that we've been in a bull market so of course they were wrong. And, full disclosure, we are still bearish based on our mounds of research evidence (See our SA page), but these facts are interesting.

Conclusion

We think Fed day does tell you something. Our main takeaway is that Fed day tells you which side of the fence most were stacked up coming into the day. They get out on Fed day. Then they get back in over the next month.

There are many beautiful reports showing that the Fed day provides a disproportionate amount of overall stock market returns over the long term.

We've been in a century long bull market and generally Fed days are up more than the average day. It is also great to know especially for bulls. The deck is stacked in your direction.

That said, we think tectonic shifts are in motion the other way, as we've stated in many reports.

For this report though, yesterday's Fed day tells us people are bullish. We're staying short (please read our stuff to find out why).

(For more numbers see the following)

Close Day 1 mo one mo Month out
Fed Day day b4 day of Perf later later Perf =? of Predicts?
06/15/16 208.04 207.75 -0.1% 07/15/16 ?
04/27/16 208.92 209.35 0.2% 05/27/16 210.24 0.4% 17 45 37.78%
03/16/16 202.17 203.34 0.6% 04/15/16 207.78 2.2% 16 44 36.36%
01/27/16 190.20 188.13 -1.1% 02/26/16 195.09 3.7% 15 43 34.88%
12/16/15 205.03 208.03 1.5% 01/15/16 187.81 -9.7% 15 42 35.71%
10/28/15 206.60 208.95 1.1% 11/27/15 209.56 0.3% 15 41 36.59%
09/17/15 200.18 199.73 -0.2% 10/16/16 203.27 1.8% 14 40 35.00%
07/29/15 209.33 210.77 0.7% 08/28/15 199.28 -5.5% 14 39 35.90%
06/17/15 210.25 210.59 0.2% 07/17/15 212.47 0.9% 14 38 36.84%
04/29/15 211.44 210.57 -0.4% 05/29/15 211.14 0.3% 13 37 35.14%
03/18/15 207.96 210.46 1.2% 04/17/15 207.95 -1.2% 13 36 36.11%
01/28/15 202.74 200.14 -1.3% 02/27/15 210.66 5.3% 13 35 37.14%
12/17/14 197.91 201.79 2.0% 01/16/15 201.63 -0.1% 13 34 38.24%
10/29/14 198.41 198.11 -0.2% 11/28/14 207.20 4.6% 13 33 39.39%
09/17/14 200.48 200.75 0.1% 10/17/14 188.47 -6.1% 13 32 40.63%
07/30/14 196.95 196.98 0.0% 08/29/14 200.71 1.9% 13 31 41.94%
06/18/14 194.83 196.26 0.7% 07/18/14 197.71 0.7% 12 30 40.00%
04/30/14 187.75 188.31 0.3% 05/30/14 192.68 2.3% 11 29 37.93%
03/19/14 187.66 186.66 -0.5% 04/17/14 186.39 -0.1% 10 28 35.71%
01/29/14 179.07 177.35 -1.0% 02/28/14 186.29 5.0% 9 27 33.33%
12/18/13 178.65 181.70 1.7% 01/17/14 183.64 1.1% 9 26 34.62%
10/30/13 177.17 176.29 -0.5% 11/29/13 181.00 2.7% 8 25 32.00%
09/18/13 171.07 173.05 1.2% 10/18/13 174.39 0.8% 8 24 33.33%
07/31/13 168.59 168.71 0.1% 08/30/13 163.65 -3.0% 7 23 30.43%
06/19/13 165.74 163.45 -1.4% 07/19/13 169.17 3.5% 7 22 31.82%
05/01/13 159.68 158.28 -0.9% 05/31/13 163.45 3.3% 7 21 33.33%
03/20/13 154.61 155.69 0.7% 04/19/13 155.48 -0.1% 7 20 35.00%
01/30/13 150.66 150.07 -0.4% 03/01/13 152.11 1.4% 7 19 36.84%
12/12/12 143.44 143.51 0.0% 01/11/13 147.07 2.5% 7 18 38.89%
10/24/12 141.42 141.02 -0.3% 11/23/12 141.35 0.2% 6 17 35.29%
09/13/12 144.39 146.59 1.5% 10/12/12 142.89 -2.5% 6 16 37.50%
08/01/12 137.71 137.59 -0.1% 08/31/12 141.16 2.6% 6 15 40.00%
06/20/12 135.70 135.48 -0.2% 07/20/12 136.47 0.7% 6 14 42.86%
04/24/12 136.79 137.31 0.4% 05/24/12 132.53 -3.5% 6 13 46.15%
03/13/12 137.58 140.06 1.8% 04/12/12 138.79 -0.9% 6 12 50.00%
01/25/12 131.46 132.56 0.8% 02/24/12 136.93 3.3% 6 11 54.55%
12/13/11 124.21 123.05 -0.9% 01/12/12 129.51 5.2% 5 10 50.00%
11/28/11 116.34 119.71 2.9% 12/28/11 124.83 4.3% 5 9 55.56%
11/02/11 122.00 123.99 1.6% 12/02/11 124.86 0.7% 4 8 50.00%
09/21/11 120.17 116.63 -2.9% 10/21/11 123.97 6.3% 3 7 42.86%
08/09/11 112.26 117.48 4.6% 09/08/11 119.04 1.3% 3 6 50.00%
08/01/11 129.33 128.78 -0.4% 08/31/11 122.22 -5.1% 2 5 40.00%
06/22/11 129.45 128.67 -0.6% 07/22/11 134.58 4.6% 1 4 25.00%
04/27/11 134.79 129.45 -4.0% 05/27/11 133.51 3.1% 1 3 33.33%
03/15/11 130.05 128.56 -1.1% 04/14/11 131.56 2.3% 1 2 50.00%
01/26/11 129.17 129.67 0.4% 02/25/11 132.33 2.1% 1 1 100.00%

Good luck and please be in touch. All of your comments teach US a ton.

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Disclosure: I am/we are short ES, BUT THAT CAN CHANGE AT ANY TIME.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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