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Fed Decision Is Likely a Lose-Lose

We're having trouble picturing a scenario where the market doesn't sell off.

We all know the big decision on interest rates is today. Even if you were living in a cave devoid of communications, you still would have heard about it. The debate has raged over the last few weeks as to not only what the Fed needs to do with the fed funds rate, but whether or not it will do it.

The possible scenarios are almost too many to count, and we could spend days exploring all the possibilities. When this is the case, sometimes it is best to just get back to basics and break it all down to its most fundamental level.

Ultimately, the market is the final judge of what everyone's expectations are and tells us how they have positioned themselves ahead of the meeting. The discount-rate cut that occurred four weeks ago started the cycle of speculation on further easing, and since then, the major indices and the broader market, to some extent, have recovered, rallying from the intraday lows some 8% based on Friday's closing level.

This strength has come as the selling has abated, short-covering has occurred and some value buyers entered the market. This buying can be largely attributed to the expectations of lower rates and the faith the Fed will navigate this latest financial crisis keeping the economy intact.

Now, with the FOMC decision upon us, we have to ask ourselves what is left to happen that is either positive or negative. Most evidence suggests there is very little positive left to occur. There are three basic scenarios: The Fed cuts 25 basis points, 50 basis points or doesn't cut at all. They may do something with the discount rate as well for good measure, but in essence those are the three scenarios.

With participants looking for a rate cut, either one of the cut scenarios is giving them what they want. If that happens, what should happen is stocks sell off, a "buy the rumor, sell the news" scenario as traders take advantage of the gains made on their expectations actually happening.

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If there is no rate cut, that would be a huge disappointment and would probably create a selloff of a larger magnitude. Logically and based on historical references, the decision on rates is a lose-lose proposition.

S&P 500 Depository Receipts

Click here for larger image.

Coincidentally, the indices and most stocks are at resistance points, a natural place to expect some pullback. By just about every measure, we should be expecting some selling off after the announcement. The magnitude of the decline is hard to know and not necessarily the focus of our argument. We merely want to point out the selloff seems imminent.

The

S&P 500

is right at resistance. The index has been rallying on light volume and has once again moved back up to the declining 50-day moving average. There is key overhead resistance in the 1490-1500 level, and this is where the rally has fallen short on two occasions. A break above this area would signal an extension of the rally. As far as any downside risk, we would start with the 1432 level as the level where any potential weakness may carry.

At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.