In yesterday’s missive “It All Comes Down To This,” I discussed the upcoming Federal Reserve meeting and the expectation that the Fed once again delays hiking rates due to global economic and market weakness.

With markets oversold on a short-term basis combined with a spike in volatility and bearish sentiment, a “punt” by the FOMC will likely spark a short-term rally in the market. Such an outcome would NOT be surprising by any means since the market has rallied the week of an FOMC “no hike” meeting since 2013.

However, those with a “bullish bias” should not become complacent in such an outlook as any rally will likely be short-lived. Let me explain.

A Change Of Trend?

As I have often written, markets do not rise or fall in a straight line. During bull markets, there are declines to previous support levels and during bear markets there are rallies to resistance.

Notice that at the peaks of previous bull markets, the initial correction looked much like all previous corrections during the bullish advance. The problem is that many failed to recognize, until far too late, the technical trend had changed for the worse.

Currently, it is being argued that this correction is just a blip in an ongoing bull market. However, there are plenty of markings that suggest that the current correction may have been the start of the next cyclical bear market. 

A 2-4 Week Rally

As stated above, FOMC meetings that have NOT resulted in a “tightening” of monetary policy have consistently ignited short-term rallies in the market. As shown in the two charts below, sentiment and volatility have reached levels suggests sellers, at many levels, have been exhausted. 

While the volatility index (VIX) is still suppressed relative to historical corrections, it is at the highest level since 2012.  When combined with the most bearish sentiment reading we have seen since the summer of 2011, and a currently oversold market condition, the ingredients needed to fuel a short-term (2-4 week) rally are present. A delay by the Fed could be the spark needed to bring speculative buyers back into the market.