The Nature of Wednesday's Rollover Is a Major Red Flag

The net loss of 0.3% wasn't that big of a deal, to be clear. The S&P 500 has certainly snapped back from worse. What sparked the pullback isn't especially troubling either. The Fed essentially said we're poised for three to four rate hikes this year, beginning in March... a plan most investors hade already made in their heads anyway.

Rather, the red flag is the almost-scripted nature of the meltdown, and where it occurred. Stocks were firmly up for the day until 2:00 pm EST, when the Federal Reserve issued an official update to its current policy. In short, the FOMC "expects it will soon be appropriate to raise the target range for the federal funds rate." Translation: Look for a quarter-point hike in March, followed by a few more over the course of the year. Stocks tanked on the news.

Except, maybe the stocks were going to take anyway.

At the risk of waxing philosophical, sometimes the market takes on a life of its own, steered by investors' psyches that are being driven by unconscious ideas. It's possible -- even likely -- that's actually what up-ended stocks today. Traders just needed a headline to latch onto and begin the selling. The Federal Reserve gave them what they needed.

There's a reason such an idea is being broached. Take a look at the daily chart of the S&P 500 below. The index was dancing with a move above the 200-day moving average line (green) for the better part of the day... a move that would have, or at least could have, sparked a more prolonged rally. The 200-day line is a pivotal indicator line though, and it's arguable traders never pushed the S&P 500 up and over because they never really intended to support this rally. In the back of their minds, they were always going to be net-sellers on Wednesday. The 200-day moving average line is the perfect place for such a mental showdown to happen.

There's reasonable support for this theory. Namely, the futures market was already betting the Fed would do exactly what it said it would do. Interest rate futures implied a 95% chance the FOMC wouldn't raise the Fed Funds Rate today, but was already betting there's an 85% chance the committee will up rates beginning in March, just as the statement from the Fed suggested with its slight tweaks of the usual language.

And this is an important nuance.

While a great deal of the work all of you (and us) do is based on reading a chart the right way, there's no denying the crowd's mood and conviction plays a huge role in how much faith we place in a chart's clues. If conviction is modest, we don't read too much into a hint. If conviction is strong, we put more credence into what a chart may be telling us.

In this particular case the chart itself is a subtle hint of bearish conviction; it almost looks like the sellers were prepared to start dumping stocks at 2:01 pm EST no matter what the FOMC had to say. If that's the case, the bearish undertones may be rooted even deeper than anyone had realized.

Backing out to a weekly chart of the S&P 500 doesn't tell us much that we don't already know, although it does confirm a couple of things. First, it assures us that there's at least something like a floor near 4269, where the index bottomed in October. Second, it confirms that the S&P 500 Volatility Index (VIX) is dancing with a technical ceiling around 38.0.

This is neither bullish nor bearish... at least not yet. Both the S&P 500 as well as the VIX are currently trapped in no-man's land, between support and resistance. Just know that in both cases this is the most action we've seen on "the other side" of key floors and ceilings in nearly two years. Something's clearly changed... another subtle hint that the unconscious bearish mindset may be more common and deep than is readily apparent.

To this end, know that market futures are deep in the red headed into Thursday's trading. The flood gates may have been opened so wide they simply can't be closed again until all the water's gone.