In what might be the most telegraphed move in Federal Reserve history, as expected, the FOMC pulled the plug on the asset purchase program we’ve all come to know and love as QE3 (QE standing for Quantitative Easing) after an extended period of reductions known as the Taper. The Fed also reaffirmed its commitment to keep rates where they are and reinvest maturing securities on it balance sheet, which serve at this point as a baseline nominal level of monetary accommodation.
The Fed couched these statements in decidedly less dovish language that set the market on edge. Not quite hawkish, though some would contend otherwise, but undeniably less dovish. So naturally, there was some volatility on the announcement.
After a quick morning rally, the market gradually sold off into the afternoon. After the Fed announcement, though, volatility spiked, and the market flopped and flailed around like a fish out of water. Down as much as 15 points at its lowest, we came within two points of a retest of the 50 day moving average at 1967. Call it a retest if you want, it was followed immediately by a bounce.
Once the dust began to settle after the initial reaction, the market seemed to find its footing, breaking out of a consolidation patter in the last hour of trade. After coming close to breaking into positive territory, we closed lower by about 2 points on the day.
Moves like this one after big market moving announcements tend to spill over into the following day, so we can’t be sure how this will finally shake out. The daily picture, though, is little changed; we made a new intraday high, but a fleeting one. If the market really believes the new monetary policy reality means the end for the bull market, the first signal of such comes in around 1967, the 50 day moving average.
Technically, the S&P has exhibited a lot of resilience of late. The only significant overhead resistance is the 1995-2000 range. Above that, we’re within spitting distance of the all time highs. Below the 50 day, the next major support levels come in at 1950 and 1910, the 125 and 200 day moving averages, respectively.
Markets may spend the day today repricing the new monetary regime into the general macro picture. There is no shortage of event risk that could knock the markets off course. Keep your stops tight, and be ready to take profits should we break down through some critical levels.