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Fed Decision Day

Dean Christians
2021-11-03

According to my calculation, the S&P 500 is up 1.73% in the four days preceding today's Fed decision day. i.e., from 10/27/21 to 11/2/21.

Let's conduct a study to assess the outlook for the S&P 500 when the index is up 1.5% or more in the four days leading up to a Fed decision day.

HOW THE SIGNALS PERFORMED

Results look good across all time frames, and I would note the solid risk/reward profile in the 1-2 month window. The 1-year time frame contains some unfavorable instances. However, they predominantly occurred during bear market environments.

Let's add a trend filter to the study to isolate instances similar to the current one. I will keep the original study parameters but now include a condition that requires the S&P 500 Index to be trading above its respective 200-day moving average.

HOW THE SIGNALS PERFORMED WITH TREND FILTER

The results look even better than the original study as the trend filter removed most bear market instances.

KEY TAKEAWAYS:

  • When the market is strong preceding a Fed decision, returns look solid on a go-forward basis
  • The study shows a 77% win rate over the next two months when the S&P 500 is trading above its 200-day moving average


Source: Federal Reserve & Bloomberg

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