While the Fed decision will certainly play a part in how the market performs on Wednesday, another factor that has historically played into Fed Day odds is simply how the market performed leading up to that decision. A rally into a decision has often lead to disappointment (or “sell the news”). A selloff into a decision often indicated the market is preparing for the worst, and you’d see a relief rally. This is demonstrated in the studies below. They show SPX Fed Day performance when SPX closed at a 5-day high vs a 5-day low the day before. With SPX now in the middle of its 3-day range, we could easily end up at either of these extremes on Tuesday.
Clearly a 5-day low sets up for better Fed Day odds. It will be interesting to see how the market acts over the next two days heading into the Fed decision.
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