After the Fed announcement on Wednesday, the dramatic reversal was unnerving… but not unexpected.

We have been keeping a study of the short-term movements of the market following Fed releases for more than 10 years. Interestingly, whatever the S&P 500 does in the first five to 10 minutes following the Fed announcement is an excellent contrarian indicator for where the index will close at the end of the day.

If the initial reaction is bullish, as it was yesterday, then 74% of the time, the S&P 500 will close lower for the day. The inverse is also true.

Few market patterns appear with such regularity; so far, we don’t have a good explanation for it, but for long-time readers, you are already familiar with the phenomenon that we have pointed out each time the Fed meets during the year. You can see Wednesday’s pattern playing out in the following five-minute chart of the S&P 500.

We are bringing this pattern to your attention so you will not be distracted by the headlines that have been written about the Fed’s announcement.

Yes, the market closed lower for the day, which is a disappointment, but it is actually just a recurring pattern with no predictive value beyond the first few hours.

What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter — traders are already pricing that in.

What is important is whether the underlying fundamentals are still positive, and so far, they are still pointing towards growth. Earnings are up, revenues are up, and as of this morning, we know that GDP growth in the fourth quarter is up. The preliminary release of GDP for Q4 showed economic growth to be the fastest since Q3 2020. The last time growth numbers were this good was 2003.

We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio. However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits. So, for now, we don’t recommend making any changes to our trades.

Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.

Stay tuned, and we’ll be back with your next issue of Trading Opportunities on Monday.

Sincerely,

John Jagerson & Wade Hansen
Editors, Trading Opportunites