The minutes of FOMC meetings are usually the kind of obscure thing that Wall Street traders follow closely, but the rest of us ignore. The decisions, if there were any made at the meeting that the minutes refer to, have already been announced when they are published, so the debate around those decisions and the process by which they are made are pretty much irrelevant for most normal people. What traders have known for some time, though, is that even subtle changes in the language can give significant clues as to the future intentions and timing of the FOMC.
That is definitely true of the minutes from the last FOMC meeting that were released yesterday. They confirmed rumors that the Fed is happy with the progress on unemployment and wary of inflation no matter how convinced they are that it is "transitory." As a result, the majority of FOMC members now favor beginning to reduce bond purchases before the end of this year. Or, to put it another way, tapering is coming, for real this time!
That matters, because there is a general feeling that the stock market’s persistent push to record highs is more about the amount of money the Fed keeps giving to banks to invest than it is about economic strength. If the Fed stops buying bonds to effectively support stocks, the market will adjust back from way above long-term averages to more realistic multiples of earnings. If tapering is coming, then so is a pretty sharp correction.
It is true that one of the strongest messages from these minutes is that they tell us nothing about interest rates. Movement away from zero in the Fed Funds Rate, the benchmark directly controlled by the FOMC, is still envisaged by the committee members as coming next year, and the market is still pricing in the Fall of 2022 as the most likely time for a hike. Bulls can also take heart from the fact that none of this is really anything new. There has been speculation that this was coming for some time, and the substance of the minutes was leaked days ago. It wasn’t exactly a shock.
The danger to the stock market, however, comes because the reaction to this news takes us close to an important technical level that I have talked about often before, most recently on Monday, the 50-Day Moving Average, marked by the blue line of this chart:
S&P 500 E-Mini (ES) YTD
The chart is for a futures contract so as to include this morning’s premarket action but, as you can see, the S&P is approaching the blue line, off of which it has bounced eight times already this year. With a support as obvious and strong as that, a confirmed break, which I would define as two days of closing below the level, can often trigger a lot of selling.
For now, though, the 50-Day MA is holding. I suspect it will continue to do so, because even after the release of the minutes, nothing has changed. Tapering is coming, which we knew it would, and rates will probably remain at current levels for at least a year. Still, the psychological importance of the 50 MA is such at this point that it could just be that the Fed has just signaled the start of a significant correction, so the next few trading days will be critical for investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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