I had previously discussed the impact of Fed meetings on the markets stating:

“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.”

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If you look at the chart again, you will notice that while the markets have tended to rally in anticipation of the Fed meeting announcement, in many cases the market fell following the announcement. The “buy the rumor, sell the news” effect is definitely apropos in this case. 

I began addressing at the end of August that the market collapse had gotten extremely oversold. As such, that set up the probability for a reflex rally back to previous support levels. 

“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 rally are present.

The chart below shows this oversold condition, and is the same “potential reflex rally” chart I have posted for the last three weeks. The dashed blue line, which I drew immediately following the initial slide, has marked the exact ‘reflex rally’ to date.”

Click on picture to enlarge

The Fed Killed It

Not surprisingly, the failure of the Federal Reserve to hike overnight lending rates sent a clear message to the markets that the economy was simply not strong enough to withstand tighter monetary policy.

While Chairwoman Janet Yellen did her best to pass off the recent disinflationary trends as transient due to the decline in oil prices, the discussion of the potential for negative rates sent a very different message. From the WSJ: