FOMC Meeting and its Effects on the Stock Market
The Federal Open Market Committee (FOMC) meeting today will be the most influential event of the month. With all the bad news that keeps piling up about the credit issues arising from loose lending in the past two years, this market needs to know that the Federal Reserve Bank is there to provide liquidity by saying that it is no longer biased towards tightening interest rates. This statement change is needed and expected by the market. In the absence of this statement, the market will more than likely resume its sell-off.
Whatever the Federal Reserve statement may be, wait for Wednesday’s trading results to give you an idea of how we will trade for the rest of August. The last two hours of trading after the Tuesday, August 7th 2:15 PM EST announcement will be very volatile but is usually a knee jerk reaction. After spending a night digesting the news, the real players will come in on Wednesday to commit to real positions. Watch high yield ETFs like HYG and brokers like Bear Stearns (BSC) and Goldman Sachs (GS) to give you leading indications. Look to see how we close. If we continue to sell-off Wednesday, the rest of August may be spent trying to find a bottom. If we end positive on Wednesday, we may have a temporary market bottom in place with a potential for a follow through in the coming weeks.
Because of the uneasiness investors feel about unknown losses in the corporate high yield debt markets and deepening slowness in the real estate market, the likelihood of a 500 point drop in the Dow Jones Industrials is very possible a day after the Fed makes their decision. On the other hand, because of the huge amount of short interest, growing amount of cash on the sidelines, and technically oversold conditions, the Dow Jones Industrials may very well rally 500 points the day after the Fed’s decision.
What the Fed will say and which way the market will react is very hard to predict. The only sure thing will be huge volatility following the announcement. Look for sentiment on Wednesday, August 8th to be your guide.
This is the most volatile market we have seen in several years. I would have guessed today’s market would have been the reaction on Tuesday, but it came a couple days later instead. The rest of the summer should see more wild swings.