A Federal Open Market Committee interest rate decision is always an important event but Wednesday's announcement is the most important in many years.
It has been a decade since the FOMC has cut interest rates and it is widely expected that it will cut Wednesday by a quarter point. There is a slight chance the Fed could cut by a half point but that would come as a major surprise.
The Fed usually telegraphs its moves fairly well and that appears to be the case this time as far as the quarter point cut. Still, there is the potential for some surprises in the accompanying policy statement or Fed Chair Jerome Powell's press conference. Market participants will be looking closely for any hints about the likelihood of more cuts. It is currently anticipated that there will be at least two more but Powell will likely state that the central bank is "data dependent."
Since a rate cut has been so well anticipated for so long the conditions are very good for a "sell the news" reaction. However, with the Fed, it is never simple. The market usually has a good idea what the Fed will announce yet it still is inclined to buy the news. Fed events never seem to be fully discounted by the market, which is supposed to be looking ahead.
The sell the news setup this time is so obvious to so many market players that it makes it unlikely to occur. If the policy statement or Powell is not as dovish sounding as the market is anticipating that could trigger some pretty fast selling but, as I've written often, this market loves to love the Fed. It wants to celebrate a dovish Fed and it tends to run over the skeptics that think that Fed policy is foolish and ineffective.
The danger for the market will likely come in a few days after Wednesday's decision is digested and there is uncertainty about when the Fed may cut again. With earnings season winding down fast and the dog days of August upon is, there will be a lack of catalysts. The U.S.-China trade issue doesn't seem like it will be resolved any time soon and signs of economic slowing continue to grow. If the market is going to correct the conditions will be very ripe next week.
Apple (AAPL) delivered a solid report and is seeing a strong positive response mainly due to better-than-expected sales in China and strong forward guidance. The numbers for the quarter were good but it is the guidance that is causing the buying interest Wednesday morning.
Apple will give everyone something to talk about but the only thing that really matters is the reaction to the Fed Wednesday afternoon. Once that news is delivered we will be able to develop a better strategy for what lies ahead.
Probably the best piece of trading advice for the last ten years has been "Don't fight the Fed." Keep that in mind as you consider how to trade Wednesday's news.