It’s Fed Day!

Expect range expansion and a bump in volatility

Follow @MrTopStep on Twitter and please share if you find our work valuable!

Our View

Earnings come out after the 4:00 cash close, yet the NQ was weak all day on Tuesday. It was especially weak just before the earnings came out and the NQ started getting sold hard.

Some traders in the MTS chat were asking if the earnings were leaked. I don’t think it was an earnings leak as much as I think it was T+2 and a rotation out of tech. Why not? Up until yesterday’s sell-off, the Nasdaq was up 4.6% YTD.

Today will be another test for the bulls, but even if the Fed says it’s going to lower rates all one has to do is look at all the job cuts: UPS Cuts 12,000 Jobs, Demands 5 Day Work Week; PayPal Cuts Global Workforce by 9%.

Those are just the recent ones! The longer list for 2024 can be found here.

Let’s face it, right now the S&P is taking the bad news and making good of it. Let’s see if that changes today! And if it’s anything like December’s Fed meeting, we will go straight up.

Let’s also keep seasonality in mind here. From my friend Jeff Hirsch of the Stock Trader’s Almanac, he notes:

As the S&P 500 goes in January, so goes the year 74.4% of the time since 1938. The next 11 months follow January 67.4% of the time. The January Barometer was devised by Yale Hirsch in 1972. With a negative Santa Claus Rally and First Five Days JB holds the key. When January is up after a down SCR and FFD, S&P 500 advanced three times over the remaining eleven months and the full year with average gains of 15.1% and 19.9% respectively. It all started with the 20th “Lame Duck” Amendment to the Constitution in 1934 where newly elected Senators and Representatives take office in the first week of January and new Presidents are inaugurated on January 20. Prior to that, new members of Congress were not seated until December of the new year. Presidents were not inaugurated until March 4. Being the first month of the year, it is the time when people readjust their portfolios and try to make a fresh start. Financial analysts rethink their outlook for the coming year. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information to digest: federal budgets, national goals and priorities, FOMC meetings, 4th quarter GDP data, earnings, and a plethora of other economic data.

Jeff Hirsch, Stock Trader’s Almanac

More can be read on the January Barometer here.

Our Lean

At 4927, the ES is 30 off the recent high and at 4907 it’s 50 off the high. Do I think we drop again? As I said I’m bullish, but cautious.

Will we see more rotation out of tech today? We could. The NQ was up some 45% last year and up almost 5% in the first month of 2024. What’s a 2% or 3% pullback from here, really?

Our Lean: The volume in the ES is totally scary. Everything will come down to what Powell has to say this afternoon, but I still think there is upside potential. If not, say hello to 4870-4880.

If the ES gaps lower today, I’m buying the open or the first pullback after the lower open. If that doesn’t happen, I’m buying the early weakness. Going to be a very big day of volatility and expanded ranges, especially once the press conference gets underway.

MiM and Daily Recap

ES recap

The ES traded up to 4957.25 and opened Tuesday’s regular session at 4946.25. After the open, the ES traded at 4946.00 and then traded up to 4954.00 at 10:15, before it dropped down to 4944.00. From there, several small buy programs pushed the ES up to a new all-time contract high at 4955.75 at 12:15. After the high though, the ES reversed back down to 4941.50 at 12:45. The new charts I have give total volume on the bars and it’s amazing how much volume can trade in a 2 to 5 minute bar.

After the drop, the ES rallied up to 4946.75, sold back down to a higher low at 4942.00, and then a buy program hit that pushed the ES back up to 4951.25 at 1:45, before it broke down to 4945.25 at 2:15 and then traded up to 4957.25 at 3:30 — see how the programs hit on the half hour? — and then traded down to 4949.50 at 3:45.

From there, the ES rallied up to 4953.50 at 3:49 and traded 4953.25 as the 3:50 cash imbalance showed $1.6 billion to sell and traded down to 4949.25 on the 4:00 cash close. After 4:00, the ES traded down to 4933.00 and settled at 4933.50, down 21 points or -0.43%, the NQ settled at 17,470.25, down 235 points or 1.33% after MSFT, GOOG and AMD reported weaker-than-expected earnings.

In the end, weakness in the tech sector overwhelmed the ES. In terms of the ES’s overall tone, both indices acted weak. In terms of the ES’s overall trade, volume was super low, with just 1.008 million contracts traded.