Equilibrium Found

Market Moves

Stocks closed nearly unchanged today in all major indexes. Large cap indexes including the S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all closed just slightly below unchanged, while the Russell 2000 (RUT) and the Russell Microcap index (RUMIC) were slightly above unchanged. 

The market's lethargy isn't terribly surprising considering the pending Federal Open Market Committee (FOMC) statement release tomorrow from Fed officials. It is worth recalling that this statement, copied, pasted, and modified after each meeting, is the primary tool the FOMC uses to communicate with investors about its monetary policy outlook. The statement contains the outcome of committee members' votes on interest rates and other policy measures. It also provides commentary about the economic conditions that influenced their votes. It is likely this commentary that the market appears to be collectively holding its breath for.

The chart below shows the comparison of Fed Funds Rate futures pricing over the past two months. In the two cases where the FOMC issued a statement, the market's reactions were very different. After the late September statement, markets almost immediately began pricing in the next rate cut (as prices drifted higher throughout the following month). Since the late October meeting, however, the price has held concretely where it began, reflecting a resolute expectation that the Fed Funds will not change rates.

This equilibrium of expectations has reached an equilibrium of prices in the market leading up to tomorrow's statement. Under such circumstances, it is only natural to look for signals the market might be giving about where investors will take prices after an announcement they already fully anticipate.

Chart showing the performance of fed funds futures

Analyzing a Bearish Signal on the Market Indexes

The chart below shows a curious signal that shows up in analyzing a combination of price action and volume statistics. The chart features State Street's S&P 500 index tracking ETF (SPY) with a technical study known as the Money Flow Index (MFI). This index calculates above average moves up (or down) and weights them according to the volume traded for the day. The calculation shows a surprisingly bearish divergence on the chart below. 

The indicator shows that volume in selling is more significant when applied to down moves than up moves over the past two weeks. As the price of the S&P 500 pushes against new highs, this indication actually breaks new lows. Similar analyses on the Nasdaq 100 and the Dow Jones Industrial Average look even worse. This short-term indication points out that markets are more likely to go lower than higher. 

Chart showing divergence of money flow index and S&P 500

Micro-Cap Stocks Showing Resilience

If the markets were setting up to see prices drop, then well-informed investors would be preparing to protect themselves from such a fall. Historically speaking, investors have typically met such moments by pulling away from investments with greater risk. Based on the chart below, that is not the situation we are in at this moment in time.

The chart below shows the same MFI indicator applied to iShares' Russell Microcap Index tracking ETF (IWC). This index, tracking many of the riskiest stocks in the market, shows that investors are seeking opportunity rather than fleeing from it. This could hardly do more to solidify the notion that investors find the market securely at equilibrium at this moment and are largely uncertain where to go next. Many analysts will be looking to the FOMC statement tomorrow to formulate an opinion about where the market can be expected to go.

Chart showing performance of micro-cap stocks and the indicator

The Bottom Line

Stocks held close to their previous closes as the markets held on to given values in the hours leading up to the release of the FOMC statement tomorrow. While some bearish indications appear on the S&P 500 and other large-cap indexes, the small-cap indexes show signs of investor enthusiasm.

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