High On FOMC Alpha

| About: SPDR S&P (SPY)
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A little over a month ago I wrote about the bias that occurs around scheduled FOMC meeting dates. The original article and research can be found here.

The research found a bias for buying on the close of the day proceeding a scheduled FOMC announcement and then selling on the close of the announcement. For the SPY there was found an average return of .70% a trade, before costs, from 2007 until June of 2012. Indeed, on August 1, 2012, it was appearing this bias would continue as SPY gaped open from 137.71 to 138.70. This was an overnight move of approximately .7%.

Source: Barchart.com

One can see this movement in the graph above. It shows that the high for the day was made in the opening minutes of trading for the day. It even appeared that the SPY might still return a very small positive trade until the last few minutes of the day. For traders it can be very frustrating loosing a good profit.

This got me to thinking of how much higher does the stock market move up on average. We know from the previous research that if you trade from close to close the average trade is .7%. But how much higher does it trade intra-day?

Below is a table of some statistics I compiled for the SPY and other stock sector ETFs. It shows the return of the high of the day, that is the day of the FOMC announcement, from the previous close. I also included other asset classes of the GLD, FXE, and TLT. If traders do attempt to speculate using this method they might want to think of exiting part of a position at the average trade (from close to close statistics); another part at various percentiles of historical returns of the highest trade from the previous close, and finally the last part at the close.

(Jan 2007 - Jun 2012)

Taking part of a position off the table when near historical returns can help traders not feel as frustrated if a last minute sell off happens again. One can also tell how frequently in the past a profit target would have been hit. For example, if a trader was looking for a 2% up move from the previous close in the SPY on FOMC announcement days in general they are likely to be disappointed; since for the last 5 years less than one quarter of the time did the SPY move above 1.92%.

The next FOMC meeting is this week and the announcement is on Thursday September 13, with a "meeting associated with a Summary of Economic Projections and a press conference by the Chairman" to follow.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SPY, GLD over the next 72 hours. 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.

Additional disclosure: I have a Position in FXE options