Here's What Markets Are Saying About Fed Rate Hike
Chris Ciovacco | Nov 30, 2015 03:19PM ET
Want To Know The Weather?
One of the easiest ways to understand the weather is to look out the window. With the market assigning an “almost a done deal” probability of 78% that the Federal Reserve hikes rates on December 16, we will be able to gain insight into “how will the market react to the first Fed hike” by simply observing the markets over the next 20 calendar days or so. With a 78% probability of a hike, markets are already adjusting for the first rate hike in nine years.
Current Read: Tentatively Bullish
As noted in , it is not unusual for markets to be difficult and indecisive heading into the first rate hike of a new rate hike cycle. The chart below shows the market is currently tentatively bullish The tentative part is summarized via the flat 200-day moving average in red, which indicates no clear long-term trend and mixed investor conviction. The bullish part is evident in the following:
- The S&P 500 is above its 200-day (red) and 50-day (blue).
- The S&P 500 recently made a double bottom (see green W below).
- A successful retest of the break above the W is still in place (point A).
Long-Term, Rare Bullish Signal Last Week
Is there anything else that aligns with the “tentatively bullish” outlook? Yes, this week’s video describes a signal that is summarized conceptually in the tweet below:
A bullish signal from the Coppock Curve is not rare at all; what is rare is the combination of deeply oversold (weak momentum) followed by a bullish signal. In fact, the combination seen last week has only occurred five other times in the last 32 years. Each of the five historical cases from a “what happened next in the stock market” perspective is covered in the video.
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Predictions Are Difficult At Best
Does the current data we have in hand tell us the markets will move higher once the Fed raises rates? No, given what we know today, the odds favor bullish outcomes relative to bearish outcomes. However, a lot can change between now and December 18 (the Friday after the Fed meeting). Therefore, under our approach we will continue to monitor the stock and bond markets with a flexible, unbiased, and open mind about all outcomes (bullish and bearish).
Short-Term Reference Points
Short-term, the S&P 500 has provided three excellent bull/bear guideposts. The concepts were described in a November 24 article. The weekly guidepost is shown below; it sits at 2095. The S&P 500 was trading below that level of possible resistance during Monday’s session. Similar levels can be found on a daily chart (2091) and monthly chart (2095).
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