S&P 500 Implied Volatility Suggests 100-Point Swing As Fed Decision Looms: Experts Say Market May Collapse After Rate Cuts

The all-important Federal Open Market Committee meeting is scheduled for the week, and the futures market is factoring in a 100% chance of a rate cut, although expectation regarding the magnitude of the cut varies. A prominent trader on Sunday said the week could see bouts of volatility.

Volatility Followed By Bearishness: The implied move of the S&P 500 Index this week would be +/- 96 points, said a trader whose X handle goes by the name @TradingThomas3. The implied move of an index is the expected price movement of the index over a period of time, usually until the end of the current week.

As he noted, this is the most important FOMC meeting of the year. The odds of a 50 basis-point hike is 59% and that of a 25 basis-point downward adjustment is 41%. Rate cut hopes firmed up after the spate of recent weak manufacturing and labor market data.

@TradingThomas3 also pointed out that the second half of September is generally bearish.

$SPX Implied move this week at +/- 96 points, biggest FOMC of the year as Feds prepare to cut funds rate for first time since 2020. 2nd half September seasonality generally bearish.
— Tom (@TradingThomas3) September 15, 2024

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Market Outlook: Sharing a chart of how the market behaves after the first rate cut, an investment advisor going by the X handle @GlobalMktObserv said stocks usually fall by about 15% within 12 months following the first cut if there is a recession. In the absence of a recession, stocks rise by more than 10%, he said. “Key caveat is, that we will know if there was a recession a few months after the cut,” he added.

🔥FED WILL CUT RATES ON WEDNESDAY FOR THE 1ST TIME IN 4.5 YEARS🔥

Stocks usually fall ~15% within 12 months following the 1st cut if there is a recession.

If no recession, stocks rise by >10%.

Key caveat is, that we will know if there was a recession a few months after the cut pic.twitter.com/R0FwjMR7jW
— Global Markets Investor (@GlobalMktObserv) September 15, 2024

A charting specialist also hinted at the downside ahead. There could be a bounce immediately after the cut but a crash could ensue, @ChartingProdigy said.

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SPX Top

By the 1st rate cut in 2001, S&P 500 already topped. $SPX got a bounce w/ the 1st cut for 19 days. Then selling resumed. In 2007, $SPY topped 17 days after the cut (link). In both cases, the #FOMC cut only produced a bounce followed by a CRASHhttps://t.co/HhJND8n3qQ pic.twitter.com/rEAiamqpv5
— King of the Charts (@ChartingProdigy) September 15, 2024

Charts shared by him showed that the S&P 500 saw a 3.5-week bounce following the January 2001 cut when the economy swooned due to the impact of the dot.com bubble burst. The upward bounce came after the market topped and then dropped by about 19.53%. The rate cut officially triggered a bear market, with the index dropping about 51% from the top and 44.50% after the bounce that followed the rate cut.

When the Fed cut rates by 50 basis points in Sept. 2007 to temper the housing market collapse, the market had a similar 3.5-week bounce. After the Sept. 18, 2007 rate cut, the S&P 500 topped 3.5 weeks later. After the completion of a double-top formation, the index plummeted by over 20%. From the Fed pivot point, the index slumped 57.77%, falling deep into correction territory.

The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund tracking the S&P 500 Index, edged up 0.02% to $562.38, according to Benzinga Pro data.

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