The Fed's Move Improves the Odds for Wall Street

Historical data indicate that the odds favor higher prices for the S&P 500 one year after a discount rate cut

By Paul Cherney

The historical odds are roughly eight (8) in ten (10) that the bottom for the S&P 500 has already been seen.

In reviewing the price performance of the S&P 500 in the wake of previous Fed discount rate cuts back to 1960, the odds are greatly stacked in favor of higher prices both 3 months after the cut and one year after the cut. When I calculate my average performances, I eliminate the best and the worst percentage changes and average the remaining figures so the following figures may not exactly match other performance figures you may have seen in the financial press.

At 3 months after a discount rate cut, the average gain for the S&P 500 has been 9.5%, for today's market that would equate to 1475 for the index. After one year (actually, 250 trade days which is roughly one year), the S&P 500 had gained, on average, 16.6% which would equate to a close of 1564 in January of 2002. There was only one occasion (in 12) when the S&P 500 was lower at the end of 12 months, and that loss was only 3.3%.

Thursday's consolidation was orderly and looked perfectly normal. It would have been nice to see a second consecutive day of gains, but when you think about it, the 14.17% gain in the NASDAQ was equivalent to two days of hearty gains in and of itself. I would disregard commentary that the lack of follow-through on Thursday was a "bad omen" for the markets. I deal with historical odds and the historical odds greatly favor that we have seen the low and that the S&P 500 will move higher.

Based on my preliminary work for a study I'm performing on price performance after a discount rate cut, (which I hope to have published tomorrow), a 2.5% retracement for the S&P 500 would be pretty normal, and that would be a close of 1314 for the index. Chances are only about 2 in 10 that the index will retest the recent lows (1245) and that would be a worst case scenario, which would create a double bottom.

For the NASDAQ: immediate downside appears limited to a dip below 2500 and prints near 2454 (a 50% retracement of Wednesday's gains).

Volume is the weapon of the bulls and for a second day in a row, the NYSE set another record for total trading volume.

Cherney is market analyst for Standard & Poor's

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