Waiting for the Fed
By Paul Cherney
The Nasdaq finished Tuesday's session in a test of immediate resistance which is 2046-2084 with a focus of resistance 2052-2075. The next resistance is 2100-2187 area. Support is 2025-1976 with a focus of support 2010-1993.
The S&P 500 has drifted below the lower edge of its closing support of 1228-1219 area.
The index has well-established support in the 1212-1184 area. Immediate (intraday, representing ultra-short-term) resistance is 1233-1240, but the next level of well-organized resistance is 1241-1277 with a focus 1241-1263.
Concerning the Fed's 6th rate cut. (I think 25 basis points) I have to point out two important observations.
VALUATIONS and THE ABILITY OF THE MARKET TO CAPITALIZE ON A 6TH RATE CUT.
The current p-e for the S&P 500 on a trailing basis is about 26.7. That's big. I used historic quarterly earnings for the S&P 500 and went back to each of the 4 prior times that the Fed cut for a 6th consecutive time and used the earnings to calculate a p-e ratio on the day of the 6th rate cut, I also calculated the percentage gain from the day of the 6th rate cut to the 250th trade day after the cut (about 1 year) to see how out of whack the current p-e ratio is and take a guess at what we can expect after the 6th rate cut.
There is one consoling factor: on each of the 4 occassions since 1960 that the Fed has cut 6 times, the S&P and the NASDAQ were higher one year later (250 trade days is roughly one calendar year).
The current p-e (trailing basis) for the S&P 500 is 26.7. In 1991, the p-e ratio was 21.7 at the 6th Discount Rate cut. At the 6th rate cut, the market shot higher for about 16 trade days and then just drifted sideways and lower and lower over the next 3 months until it had retraced 84% of the gain seen from the close of the day of the 6th rate cut to the initial top 1/15/92 which was the 16th trade day after the cut (a gain of 8.8%). It took until November of 1992 for the S&P 500 to effectively breakout above the high it had established on the 16th trade day after the rate cut. The p-e in November of 1992 had actually risen to about 23.6. So, I'm wondering whether the current p-e of 26.7 is worth worrying about.
The Fed annoucnes aroud 2:10- 2:15 open Wednesday. Over the next 10 trade days we are likely to see some sort of favorable reaction to this cut. Judging by the excessive p-e ratio in place right now, gains inteh wake of a 6th rate cut may be short-lived and even though the market may not give up much ground in the ensuing months (like 1991-1992), it might not gain too much either, just look at a chart of the 1992 performance of the S&P 500.
Cherney is Market Analyst for Standard & Poor's