This FOMC pattern suggests higher stock prices

Dean Christians

2021-12-15

Key points:

The S&P 500 closed down on consecutive days before an FOMC decision day
On Monday, the S&P 500 fell 0.91%, and on Tuesday, it closed down 0.75%
The S&P 500 showed a tendency to rally after other signals

Stock trends around FOMC decision days show a clear pattern

Traders may be showing some anxiety ahead of Wednesday's FOMC decision and statement, with the S&P 500 suffering fairly large back-to-back declines. Let's assess the outlook for the S&P 500 when the index closes down on consecutive days prior to an FOMC decision day.

This signal has triggered 48 other times over the past 32 years. After the others, future returns and win rates were solid, with several significant risk/reward profiles. If you exclude the 2000-02 and 2007-08 bear markets, the 1-year time frame shows one instance with a negative return.

Returns when the S&P 500 is in an uptrend

Let's add some context to the study. I will keep the previous conditions and now include a trend filter. The S&P 500 must be trading above its 200-day moving average, which is the case now.

This signal has triggered 30 other times over the past 31 years. After the others, future returns and win rates were solid, especially in the 6-12 month time frame. And, drawdowns were minimal in the two long-term time frames.

Results when the S&P 500 is down 0.5% or more

With the S&P 500 down 0.91% and 0.75% respectively on Monday and Tuesday, let's isolate historical instances when the S&P 50 closes down 0.5% or more on the two days before a decision day.

This signal has triggered 12 other times over the past 31 years. After the others, future returns and win rates were solid on a short to medium-term basis. However, bear market instances impacted the long-term results.

Short-term results when the S&P 500 is down 0.5% or more

If I shorten the study time frames, the pattern shows a strong tendency to recover over the subsequent few sessions. The 2-day window shows an excellent return and risk/reward profile.

What the research tells us...

Stock trends around FOMC decision days show a clear bias for a snapback when the S&P 500 closes down on consecutive days before a decision day, especially in a market uptrend. Similar setups to what we're seeing now have preceded solid returns and win rates for the S&P 500 across multiple time frames.