I'm taking a day off from exploring price change/momentum patterns in order to look at recent Fed announcement days. (See my Trading Markets article on the topic, which should appear Tuesday AM).
The gist of my findings is that Fed days no longer carry the volatility that they used to. The average daily range for the S&P from January, 2003 to November, 2005 has been 1.09%. On Fed days between January, 2003 and August, 2004, the average daily range has been 1.45%. Since September, 2004, however, the average daily range on Fed days has dropped to .90%.
Between January, 2003 and August, 2004, the average daily range was 1.26%; between September, 2004 and November, 2005, the average daily range has been .88%. Fed Days were modestly more volatile than average in the S&P prior to September, 2004; from that point forward, they were no different from the average market day.
This pattern is even more dramatic in the NASDAQ 100. Between 1/03 and 8/04, the average daily range was 1.83%. On Fed days, however, the average range was 2.31%. After 8/04, the average daily range for the NASDAQ has been 1.23%--but Fed days have only averaged 1.14%.
The same pattern occurs for both the Russell 2000 stocks and the S&P Midcap issues. Both indices were more volatile than average prior to September, 2004 on Fed days, but since that time, the Fed days have been no more volatile than average.
Here's another interesting pattern: Fed days tended to be up days prior to 9/04 (when they were more volatile), but have been down days on average since then. However, the three days following Fed days tended to be weak during the volatile times and recently have tended to be strong. The net message of this pattern is that, if the Fed does not produce a genuine surprise and policy change at its meeting, the intial market reaction to the report tends to reverse over the next three days.
I attribute the volatility change to the increasing transparency and gradualism at the Fed, which has reduced the number of surprises coming from the meetings. If the new Fed chairman continues these policies, we may see continued muted responses on Fed days.