FOMC Strategy Revisited

As readers know, investment and trading decisions can be optimized with the help of statistics. One way of doing so is offered by the FOMC meeting strategy.

 

The rate hikes are actually leading somewhere – after the Wile E. Coyote moment, the FOMC meeting strategy is especially useful [PT]

 

A study published by the Federal Reserve Bank of New York in 2011 examined the effect of FOMC meetings on stock prices.  The study concluded that these meetings have a substantial impact on stock prices – and contrary to what most investors would probably tend to expect, before rather than after the committee announces its monetary policy decision.

 

S&P 500, average behavior around the FOMC announcements over the past 30 years (240 events) – the statistics in this chart refer to a one-week holding period (buy 3 days before, sell 4 days after announcement) in line with the maximum average gain (145 gains vs. 95 losses). However, the bulk of the gains are achieved in the days before the announcement – the annualized risk-adjusted gain can actually be boosted considerably by confining oneself to this three-day holding period (statistics shown further below). [PT]

 

Study Shows: Time Period Shortly Before the FOMC Announcement Most Important for Stock Prices

The impact is so strong, that it would have been possible to achieve almost the entire cumulative return of the S&P 500 Index since 1998 if one had invested exclusively during the days when FOMC meetings were held.

The next chart illustrates the situation. The blue line shows the trend in the S&P 500 Index since 1998, indexed to 100. The green line depicts the cumulative return of investing exclusively on FOMC meeting days, the red line shows the cumulative return achieved by investing exclusively on all remaining trading days.

 

S&P 500 Index, FOMC meetings (green), other trading days (red), 1998 to 2017. A mere 16 trading days per year generated almost the entire return of the index!  [Note the action on FOMC days in 2008 – 2009, when the market’s hopes became pinned to the beginning money printing orgy – PT]

 

As can be seen, one could have made a profit almost equal to a “buy & hold” return, while taking substantially less risk by investing exclusively during FOMC meetings – which take up a mere 16 trading days per year. By contrast, the red line is lagging behind by a wide margin. In short, just 6.3 percent of all trading days generated considerably larger returns than all 93.7 percent of the remaining trading days combined!

It definitely made a lot more sense to buy stocks in the days leading up to FOMC meetings than buying them thereafter. It was also possible to optimize the timing of sales after the release of policy statements.  As these data illustrate, the information provided by event studies is useful for conservative investors as well – it is not only of interest to short term traders.

 

Taking Advantage of the FOMC Meeting Strategy May Be Particularly Promising at the Current Juncture

The FOMC meeting strategy could actually be particularly interesting at this time. Here is why: Stock markets have been in unbroken uptrend for the past nine years. It seems doubtful that they will continue to rally without problems for another nine years; it seems rather more likely that a price decline – possibly a large decline – will eventually take hold.

The FOMC meeting strategy tends to generate especially strong outperformance bear market environments. And perhaps a time when the market will weaken is indeed what lies ahead. Under such circumstances, applying the FOMC meeting strategy (and other event strategies suggested by the Seasonax app) will definitely improve returns. The approach is certainly a viable alternative to simply selling one’s entire equity portfolio. Take advantage of FOMC meeting days!

 

Addendum by PT: 3-day Holding Period

As noted above, the annualized risk-adjusted return is actually boosted considerably by shortening the holding period from one week to three days. While the average gain is only 41 basis points vs. 57 basis points, the annualized return is ~45% vs. ~20% due to the shorter holding period; obviously, cutting down on the time during which one is exposed also means that one incurs less risk.

Moreover, in the past 30 years the ratio of profitable vs. losing trades improves to 160 vs. 80  compared to 145 vs. 95 when using the one week holding period – however, the gap between maximum gains and maximum losses narrows noticeably as well and the cumulative gross profit declines commensurately.

 

The 30-year FOMC event study with a shorter holding period (3 days vs. one week) – see the statistics on the right hand side [PT]

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix method in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange. For in-depth information on the Seasonax app click here (n.b.: subscriptions through Acting Man qualify for a special discount! Details are available on request).

 

Charts by: Seasonax

 

Image captions by PT where indicated

 

 

 

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Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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