The Fed Hikes Rates, and the Market Rallies. Does History Say 'Buy the Dip'?

By Yogurt · 2026-09-18 · Market Analysis

The Federal Reserve raised rates by 0.25%, and the market's reaction was a powerful surge, with the S&P 500 up 1.1%. This counter-intuitive rally has historical precedent: in 3 of the last 5 similar meetings, the post-Fed dip was a major buying opportunity. We break down the data, the bearish sentiment, and the key technical level at S&P 7670 that could unlock the next leg up.

In a classic 'sell the rumor, buy the news' scenario, the stock market shrugged off the Federal Reserve's official announcement of a 0.25% interest rate hike, posting a powerful rally. The S&P 500 climbed 1.1% and the Nasdaq surged 1.76%, a seemingly counter-intuitive reaction that left many traders wondering: was that the bottom? A look at recent history suggests it just might be.

Why a Rate Hike Sparked a Rally

The market's positive reaction stems from one simple fact: the rate hike was universally expected. With the move already 'priced in' by weeks of trading and commentary, the certainty of the announcement removed a major overhang of uncertainty. Investors, who had been de-risking and bracing for the worst, felt confident to step back in. The day of the FOMC announcement itself was negative, which is a common pattern, but the subsequent day's rally showed conviction.

History as a Guide: The Post-Fed Playbook

This isn't the first time we've seen this pattern. An analysis of the last six Fed meetings this year reveals a compelling trend. On the day of the decision, the market is almost always red. However, what happens next is what matters.

In two of the last five comparable meetings (July 29th and April 29th), the day of the Fed's decision marked the exact bottom of a short-term dip. From there, the S&P 500 rallied 6.5% and 7.2%, respectively.
In one instance (June 17th), the market saw a small initial bounce followed by a decline.
In another, the market continued to drift lower.

While not a guarantee, the data shows that more often than not recently, the post-Fed period has been a buying opportunity, not a time to panic. With three out of five of the last relevant instances leading to a bottom, the odds favor the bulls.

Sentiment is Abysmal - And That's Bullish

Further strengthening the bull case is the incredibly negative sentiment among retail investors. The latest American Association of Individual Investors (AAII) survey revealed that a stunning 53% of respondents are bearish on the market. Historically, such extreme pessimism acts as a powerful contrarian indicator. When the crowd is convinced the market is going down, it often means most of the potential sellers have already sold, leaving more room for upside than downside.

The Chart to Watch: A Bull Flag Emerges

The technical picture aligns with this cautiously optimistic outlook. The recent, orderly pullback in the S&P 500 has formed a potential 'bull flag' pattern. This is a classic continuation pattern that suggests the market is simply consolidating before its next move higher.

The key level to watch is 7670 on the S&P 500. A decisive breakout above this resistance level would confirm the bull flag and could propel the index back towards its all-time highs around 7800. Conversely, if the market is rejected at this level, it could signal a continuation of the downward correction.

Headwinds Remain

It's not all clear skies. High oil prices, hovering around $96 a barrel, remain a significant concern, acting as a tax on consumers and businesses. Furthermore, high bond yields mean the bond market is already doing much of the Fed's tightening work for it, which could continue to act as a brake on the economy and the stock market.

Ultimately, while the risks are real, the combination of a priced-in Fed hike, a historical pattern of post-FOMC rallies, extreme negative sentiment, and a bullish technical setup suggests that the dip-buyers may be right this time. The test of S&P 500 at 7670 will be the tell.