Bears Embrace a Dovish Fed

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Jerome Powell and the Federal Reserve tried to deliver a dovish announcement. But the market viewed it as hawkish, or just plain bearish.

At one point, the S&P 500 was up more than 1 percent. It reversed those gains to end the session down 1.5 percent at its worst level since September 2017.

The Fed more or less delivered as expected, hiking rates 25 basis points while eliminating one potential increase next year. It also trimmed its forward growth forecast.

The U.S. dollar (@DX) rose on the news, while bond yields moved lower. Both of those were bearish reactions as investors shunned risky assets. Why would they do such a thing when the Fed is “dovish” and still predicting GDP growth near 2 percent?

The answer appears to be an unhinging of corporate profits, and thus stock prices, from the broader economy. Analysts have discussed this more frequently since last earnings season. (Click here for our coverage.) We’ll also have a special report on the widening disconnect next week.

Traders can take another lesson from Wednesday’s price action: “Buy the rumor, sell the news.” After all, stocks rallied into the Fed announcement, hoping for something dovish. Then sellers materialized shortly after it occurred. It’s a cliche for a reason.

S&P 500 showing levels and outside day.
S&P 500 showing levels and outside day.

Let’s not overthink the importance of a Fed meeting because stocks were trending lower beforehand. They simply continued that momentum, in the process testing the 2500 area cited on Monday’s Market Action webinar. (There was also an outside day on the S&P 500.)

Going forward, the most important issue could be currencies with @DX still in an ascending triangle. Meanwhile emerging market ETFs like EEM, FXI and EWZ slipped from their 50-day moving averages. Did you know those global assets have outperformed the S&P 500 in the last month? Will that trend continue, or reverse, if the greenback keeps rising?

In conclusion, Wednesday’s Fed announcement wasn’t much of a surprise. Now that it’s passed, investors can return their attention to the real story: Chinese trade, corporate earnings and levels on the S&P 500.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.