Market Reaction to Fed Days

06Aug08

Rob Hanna of Quantifiable Edges got my creative juices flowing with his look at how the market reacts to Fed meeting days in a down trending market.  I want to expand on Rob’s numbers by looking at the market’s reaction in both up and down trending markets depending on the Fed’s decision to raise, lower, or maintain the target Fed funds rate.

Note that the results above only include scheduled Fed meetings from 1994 to date and I’ve defined an up/down trend as whether the S&P 500 is above/below its 200-day moving average.  The three numbers presented in each cell are (1) the number of days that met that criteria, (2) the (geometric) average return of those days, and (3) the % of those days that were positive.

A word of caution: in most of the cells above, there are too few instances to draw a strong conclusion, so treat these results with a very skeptical eye.

Some observations based on this data:

  1. In general, Fed meeting days have been neutral to bullish for the market depending on the broader trend and the decision on rates, but have generally been more bullish in up trending markets.
  2. Fed meets have been least bullish when the Fed decreases rates in a downtrend (read: “acknowledgement”) maintains rates in a downtrend (read: “complacency”) or increases rates in an uptrend (read: “the party is over”).  See word of caution above.
  3. Fed meets have been particularly bullish when the Fed increases rates in a downtrend and decreases rates in an uptrend, but naturally, these have been few and far between. See word of caution above.

More to follow.  I’d like to expand these results to prior to 1994.  I think  the results might be very dependent on the broader era the markets are in at the time (like testing a trend-following strategy), so I think it makes sense to broaden the analysis.

For now, I think at the very least I want to consider “training” the self-tuning YK strategy to be wary of taking a big short position on a Fed meeting day (MarketSci is long-only) as this isn’t something it is currently “aware” of.

Happy Trading,
ms

 

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Filed under: Time-based   |  2 Comments

2 Responses to “Market Reaction to Fed Days”  

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  1. 1 Rob Hanna on August 6, 2008 said:

    Excellent work Michael. If you’re not anticipating a rate increase and the market is in an uptrend it appears there’s a decent edge to the long side.

    It also looks like I’m going to have to visit here some more.

    Rob Hanna

    Reply
  2. 2 marketsci on August 6, 2008 said:

    Thanks Rob – you’re always welcome here.

    I think for myself I’m not going to play it as a long play necessarily – more as a day that I don’t want to be heavily short, especially in an uptrend…just too few observations.

    Also, I think I may do a follow up at some point looking at these numbers not based on the trend but based on whether the market is short-term oversold/overbought (more like what you did). I think that might tell its own unique story.

    Thanks for the contrib Rob,
    michael

    Reply

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