Volatility Trends on FOMC Announcement Days

Institutional participation remained light ahead of Wednesday’s Fed announcement. TICKscore closed at -2, Cumulative TICK -26,000. New 52-week lows declined on the NYSE and were flat on the NASDAQ compared with Monday, triggering the short-term buy signal outlined in Tuesday’s intraday update. [That setup technically looked for a decline in new 52-week lows, but looking for ‘flat’ or ‘down’ new lows produced essentially the same track record.)

VXO closed up 4% to 24.85, sending the Band Spread indicator discussed yesterday below 15%, a generally positive sign for stocks.  With the Fed  announcement on tap, keep in mind that volatility generally trades lower on FOMC announcement days. The table below highlights the VXO’s performance from open to close during each of the last thirty regularly scheduled FOMC days…

VXO Performance on FOMC Announcement Day
08/12/09… VXO ??? from open to close
06/24/09… VXO -1.7% from open to close
04/29/09… VXO -2.6% from open to close
03/18/09… VXO -2.6% from open to close
01/28/09… VXO -1.6% from open to close
12/16/08… VXO -7.8% from open to close
10/29/08… VXO +2.0% from open to close
09/16/08… VXO -9.9% from open to close
08/05/08… VXO -9.0% from open to close
06/25/08… VXO -2.4% from open to close
04/30/08… VXO +2.1%  from open to close
03/18/08… VXO -13.0% from open to close
01/30/08… VXO -4.1% from open to close
12/11/07… VXO +12.0%  from open to close (*)
10/31/07… VXO -13.3% from open to close
09/18/07… VXO -21.3% from open to close
08/07/07… VXO -6.2% from open to close
06/28/07… VXO -3.0% from open to close
05/09/07… VXO -8.6% from open to close
03/21/07… VXO -12.0% from open to close
01/31/07… VXO -8.4% from open to close
12/12/06… VXO -3.3% from open to close
10/25/06… VXO -1.6% from open to close
09/20/06… VXO -1.4% from open to close
08/08/06… VXO -2.0% from open to close
06/29/06… VXO -17.5% from open to close
05/10/06… VXO -1.9% from open to close
03/28/06… VXO +0.6% from open to close
01/31/06… VOX +1.4% from open to close
12/13/05… VXO -9.3% from open to close
11/01/05… VXO -2.7% from open to close

Note that in only one case out of the last thirty did the VXO gain 5% or more, while it lost 5% or more twelve times. This tendency remains consistent throughout all FOMC announcements since the beginning of 1993. Invariably, the VXO will trend sideways or head convincingly lower off the open. In only eight cases, or about 5% of the time, did the VXO close up 5% or more from the open. Rarely has the VXO managed any substantial gains because the market has already factored in the potential for stepped-up volatility prior to the actual Fed announcement. It’s only when the VXO gains 5% or more (from the open) that it reflects a market caught off guard by the Fed’s announcement. Not surprisingly, these cases have typically led to a difficult period for stocks over the next two months, as the table below illustrates…

VXO +5% or More from Open on Fed Day
12/11/07… VXO +12.0%… S&P -9.9% two months later
09/20/05… VXO +6.0%… S&P +0.6% two months later
03/22/05… VXO +5.9%… S&P +1.2% two months later
01/28/04… VXO +12.1%… S&P -1.7% two months later
10/03/00… VXO +4.6%… S&P -5.9% two months later
02/05/97… VXO +4.9%… S&P -2.6% two months later
02/04/94… VXO +42.8%… S&P -4.6% two months later
09/21/93… VXO +8.3%… S&P +3.0% two months later

Since the July 23rd surge that sent the S&P Trendline Oscillator over 10.0, the market has not looked back. This is consistent with the S&P’s performance during each of the previous nine instances in which the Oscillator hit such an extreme level. The S&P was higher one, two and three months later with drawdowns less than 2.5% in each case (see my July 23rd column). So far the market is following the same script this time around, and assuming that continues SPX 950 should represent solid support.

It would also be encouraging if the S&P500 can remain above its 20-day moving average, which currently stands at 978. Tuesday represented the 21st consecutive session that the S&P has closed above its 20-day average. If it can keep that streak going for another nine trading days, it would have bullish implications heading into the end of September. The table below lists the last thirty separate instances in which the S&P500 held above its 20-day moving average for thirty consecutive sessions, along with the performance of the S&P over the following month. Note that when buyers have held the upper hand for such an extended period of time, they’re usually able to maintain that advantage…

S&P500 Above 20-day Average Thirty Consecutive Sessions
04/23/09… S&P500 +4.3% one month later
05/01/07… S&P500 +3.0% one month later
10/19/06… S&P500 +2.4% one month later
09/01/06… S&P500 +1.6% one month later
12/09/05… S&P500 +2.4% one month later
01/07/04… S&P500 +0.2% one month later
09/23/03… S&P500 +1.7% one month later
05/22/01… S&P500 -6.6%  one month later (*)
11/25/98… S&P500 +3.3% one month later
03/10/98… S&P500 +4.3% one month later
06/03/97… S&P500 +5.4% one month later
02/13/97… S&P500 -2.3% one month later
10/18/96… S&P500 +3.8% one month later
12/13/95… S&P500 -3.2%  one month later (*)
10/06/95… S&P500 +1.4% one month later
04/21/95… S&P500 +2.1% one month later
01/26/95… S&P500 +4.3% one month later
08/24/94… S&P500 -1.7% one month later
11/30/92… S&P500 +1.5% one month later
02/28/91… S&P500 +2.2% one month later
12/20/90… S&P500 +0.3% one month later
08/17/89… S&P500 +0.2% one month later
10/14/88… S&P500 -2.8% one month later
02/13/87… S&P500 +3.1% one month later
11/14/86… S&P500 +1.5% one month later
03/11/86… S&P500 +0.9% one month later
11/20/85… S&P500 +5.5% one month later
02/20/85… S&P500 -1.2% one month later
05/18/83… S&P500 +3.6% one month later
09/28/82… S&P500 +9.1% one month later

Categories : Archived EOD Commentary, End-of-Day Commentary

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