Ever since the dramatic market pullback on Aug. 24, the S&P 500 has been consolidating in a tighter and tighter range as investors have been desperately trying to determine whether the Federal Open Market Committee (FOMC) is going to raise interest rates at its meeting this week.
However, something seems to have changed this week. As you can see in the 5-minute chart of the S&P 500 ETF (SPY) in Figure 1, the tightening consolidation range was broken yesterday (Sept. 15), and the market is starting to drift back up to its recent high-water market at about $200 — the equivalent of 2,000 on the S&P 500.
Figure 1 — 5-Minute Chart of the SPDR S&P 500 ETF (SPY)
It appears investors are starting to position themselves for the potential of the FOMC leaving interest rates unchanged.
This shift in expectations for the FOMC is a recent development. According to the CME Group’s FedWatch Tool (see Figure 2), the probability of an interest rate hike has dropped to only 21%.
Figure 2 — CME Group FedWatch, September Rate Hike Expectations
This the 21% figure is a decline from a probability of 45% just one month ago.
Additionally, the probability of an interest rate hike in December — the next time, after this month’s update, that the FOMC will be updating its economic projections — is also falling.
According to CME, the probability of a December rate hike has dropped from 73% to 63% during the past month (see Figure 3).
Figure 3 — CME Group FedWatch, December Rate Hike Expectations
Of course, a 63% chance in December is still much higher than the 21% chance in September, but the fact that the probabilities are falling across the board tells us that investors are starting to wonder if the increased market volatility in China, slowing global economic growth and falling inflation levels (see Figure 4) are going to force the FOMC to keep interest rates low.
Figure 4 — Cleveland Fed’s Inflation Nowcasting
From the price action we have been seeing during the past two trading days, it appears Wall Street believes it may be getting a last-minute reprieve from the rate hike that many feared would drag the U.S. economy — and the U.S. stock market — down.
If the FOMC holds off on its interest rate hike, watch for stocks to rebound. As far as Wall Street is concerned, the longer we can keep interest rates low, the better.
Because the market in general has been depressed since late-August, if there is no rate hike, there is likely to be a broader market rebound. However, sectors like utilities, financials and consumer discretionary — which all benefit from low interest-rate environments and steeper yield curves — should be able to lead the way higher.
The one caveat is the energy sector. If oil prices continue to rebound like they have been today, energy stocks could be the big winners this week.
Of course, if the FOMC does move ahead with its rate hike, all bullish bets are off.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
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