Sunday, February 22, 2015

Keystone's FOMC Congressional Oversight (Humphrey-Hawkins) Twice-Yearly Bullish Market Indicator

The Federal Reserve must testify before Congress semi-annually (twice per year), typically in late February and also in July. The two-day stints in testimony typically result in bullish days for the markets, especially the last few years with former Chairman Bernanke and now current Fed Chair Yellen promising to drop money from helicopters indefinitely. The stock market is typically bullish moving through the two-day Congressional testimony.

The idea is to enter the market long the day before the first day of testimony and then exit the long trade the day after the second day of testimony. This results in an 80% success rate. The period from the day before the testimony to the second day of testimony is typically up strongly as well, and also the two-day testimony itself typically results in an up move from the first day to the second day, but the period that bookends the overall testimony from the day before, to the day after is the highest percentage move.

Note that the incorrect July 2007 number occurred just before the October 2007 market top, and the incorrect read in February 2008 is when the financial sector bubble popped so the markets were not in a good mood back then. The incorrect read March 2012 was exactly as the markets were topping and rolling over.

The February 2014 testimony receives a rare split of the two day meeting due to a snowstorm in Washington, DC, so the individual dates are used to assess the indicator and each testimony results in up days for stocks as Yellen flaps her dovish wings. Last July, the same pattern occurs with a nice up move in stocks into the second day, a 12-point gain, but the day after the meetings ended, 7/17/14, the SPX fell from 1982 to 1955, a 27-point dump, so the indicator is given an incorrect rating. If this fractal repeats in the week ahead the SPX would dump 30 handles on Thursday, 2/26/15.

The indicator favors the bulls so stocks are expected to be buoyant early in the trading week especially as Yellen coo's dovish sounds on Tuesday and Wednesday. Over the last seven years, the indicator is correct 13 times that bullish rallies did occur while wrong 4 times; the indicator is correct 76% of the time over the last seven years. Interestingly, all four incorrect signals, where stocks were weak through the Congressional testimony, resulted in a weaker stock market period for the days, weeks or months after.

2/24/15 -- 2/25/15; 
7/15/14 --7/16/15; 1970/1958 (but up 1970/1982 for two days; the day after the meetings was a huge 27-point selloff); Markets are Down; Incorrect
2/27/14 (snowstorm rescheduled); 1844/1860; Markets are Up; Correct
2/11/14; 1796/1820; Markets are Up; Correct
7/17/13 -- 7/18/13; 1671/1684; Markets are Up; Correct
2/26/13 -- 2/27/13; 1488/1515; Markets are Up; Correct
7/17/12 -- 7/18/12; 1354/1377; Markets are Up; Correct
2/29/12 -- 3/1/12; 1372/1370; Markets are Down; Incorrect
7/13/11 -- 7/14/11; 1314/1316; Markets are Up; Correct
3/1/11 -- 3/2/11; 1327/1331; Markets are up; Correct
7/21/10 -- 7/22/10; 1083/1103; Markets are Up; Correct
2/24/10 -- 2/25/10; 1095/1104; Markets are Up; Correct
7/21/09 -- 7/22/09; 951/976; Markets are Up; Correct
2/24/09 -- 2/25/09; 743/753; Markets are Up; Correct
7/15/08 -- 7/16/08; 1228/1260; Markets are Up; Correct
2/27/08 -- 2/28/08; 1381/331; Markets are Down; Incorrect
7/18/07 -- 7/19/07; 1549/1534; Markets are Down; Incorrect
2/14/07 -- 2/15/07; 1444/1456; Markets are Up; Correct

The Lines of Data are;
Congressional Testimony Two-Day Meeting Date; SPX price the day before the two-day meeting/SPX price the day after the meeting; Are markets up or down?; Is the indicator correct or incorrect in predicting a bullish stock market for the Fed testimony?

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