So here we are at that vaunted Fed meeting that has been discussed for so long. Will the Fed raise interest rates after more than 6 years at zero? The debate has raged for far too long. There are only two things that I have continued to point out about the decision. The Fed has a dual mandate, and the half that has been continually ignored is the inflation target. And raising rates because it has been too long at zero would not be a policy decision but rather a random act.
I do not know what the Fed’s exact criteria are for raising rates. They may be met and the decision made tomorrow. The market is betting against it with the probability of a hike priced into Fed Funds Futures contracts hovering in the high 20%s. Market participants seem to have lined up over the past month or so along the lines of Forex and Bond traders arguing for a hike, while equity managers and traders are less certain or aligned toward no hike.
What will happen? I do not know and neither does anyone else. What I do know is that after a strong move lower in equity price and a spike in the VIX, both are now moving toward key levels. They are on the edge.
Starting with the 5 minute chart of the SPDR S&P 500 (NYSE:SPY) above since the August 24th drop, the price has been building an ascending triangle. This consolidation has been happening over declining volume. It could signal an end to the selling pressure, exhaustion. Or a pause in that action before yet another leg lower.
A break of this triangle will signal to market participants which is the next move, higher or lower. Despite the excitement from the strong move higher Tuesday, there was no significant change to the message. Absorption, digestion, sideways motion, still on the edge.
The CBOE Volatility Index spiked to over 50 but has been declining since. Not nearly as fast as previous spikes. But it is also now back to the edge. In this case the edge of a move into a normal zone. I have talked about the 22-24 area in the VIX as a key turning point over the past several years. Now one day ahead of the rate decision it has fallen back to that zone, but not moved below it.
So not only are traders of all markets on the edge of their seat into this FOMC meeting, but the benchmark for the world, the S&P 500 is too, and its broad strokes measure of uncertainty, the VIX. I have said for a long time that I do not expect a rate hike in September. But in the end it is not important if they raise rates or not. What is important is how the S&P 500 and VIX react to the decision.
A move under 22 and better yet 20 on the VIX and a move over 200 in the S&P signals all clear. A reversal higher in the VIX accompanied by a move under the S&P 500 triangle at least one more leg lower. But until then, they will live on the edge.
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