Side Street

Don't Expect Fireworks Post-FOMC

Posted on 12/12/12 - 11:18 AM EST

The FOMC Meeting Announcement used to be reliable for one thing: volatility. This was always a market moving event where being on the right side of the trade meant a very good day.

Unfortunately, the volatility has been drained from the event, partially due to the Fed's ZIRP policy, and partially due to a structural change in the event itself. In a bid to become more transparent, the Fed has added a press conference immediately following the announcement (in most instances). Gone are the days when they released the statement and left the market twisting for a month waiting for the minutes. The chairman is now available right away to take your questions.

This structural change in the way the Fed communicates with the market has had a measurable effect on volatility and how traders trade around the announcement.

Below is the pattern recognition analysis of every pre-credit crisis FOMC release between 2002 and 2007. The play on those release days was clearly to take the first pullback counter to whichever definitive direction the market headed, looking for follow thru in that direction. If the first big move was to the downside, you waited for a big pullback. If the first move was to the upside, you had to get on the bus real quick. I'm sure most traders working through this period intuitively remember these trading sessions.

Now look at the new regime of announcements with a press conference following. I've only included 2012 because this is the first year where the majority of the announcements have had a presser following (5 of 8). As you can see, there is significantly less volatility and very little in the way of follow through or predictability (notable absence of 2:15 PM explosion). If there is volatility it is usually completely retraced by the end of the day (curve 2).

The market change and the cheese moves. Unless the Fed has something monumental to announce today, I expect it to be a rather subdued afternoon.

THE BLOG: http://dynamichedge.com/2012/12/12/fomc-meeting-announcement-patterns-in-history/