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Is the Fed Boosting the Stock Markets? The Numbers Don't Lie...

Stock-Markets / Market Manipulation Oct 16, 2010 - 05:16 AM GMT

By: DailyWealth

Stock-Markets

Best Financial Markets Analysis ArticleJason Goepfert writes: Anyone who's read my SentimenTrader advisory over the past nine years knows I'm not a conspiracy theorist.

Out of the approximately 2,500 comments I've posted, I've alluded to market manipulation probably fewer than half a dozen times.


Whenever I hear about "evil investment banks" or "politicized Fed bankers" or "automatic trading algorithms," my eyes kind of glaze over, I huff, "get over it," and I concentrate on finding market anomalies to trade.

But I'll be perfectly honest here – I'm starting to crack. You see, my job is to analyze market data. I've done it for more than a decade. And the trading patterns I'm seeing during the day, especially lately, are not what we've typically seen in the past.

Last Wednesday's trading session is a perfect example. We were seeing persistently weak readings in the NYSE TICK indicator (meaning more stocks last traded on a downtick than an uptick), and yet the S&P futures kept creeping higher at the same time. That is extraordinarily unusual.

I'm not going to spend my time looking at every tiny stock movement as evidence of "manipulators" at work. The market has always been manipulated by somebody – the story never changes, only the characters do.

But today I do want to touch on something that's getting a lot of attention, which is the latest announcement of Permanent Open Market Operations (POMO) by the Federal Reserve, found here. This is where the Fed announces, in general, what government securities it is going to buy and how much. Many are starting to believe these funds wind their way through the system and end up in the stock market.

I'm not going to pretend I have any great insight as to whether this is true, the actual mechanics of how it would work, or what other ways the Fed might be propping up stock prices. I'm just going to take the data at face value and see what impact it has had on stocks.

So let's use the Fed's data on POMO days to see if the S&P 500 had any tendency to rise on those days or immediately thereafter.

The table below shows the S&P's performance on days there were no POMO buys, and compares that to all POMO days, those greater than and less than $3.5 billion, and then by the different types of bond purchases the Fed does. The data begins in August 2005. (Don't worry about focusing on all the numbers, I'll tell you what it all means just below the chart.)


One thing stands out pretty clear: The market was more likely to rally, and with a significantly higher return, after POMO days than after non-POMO days.

Looking at returns one month later, if there were no POMO operations, the S&P was positive 58% of the time with a median return of -0.3%. But if the Fed was active on a particular day, a month later, the S&P was up 78% of the time with a return of +2.6%.

That's a stark difference.

And the larger the operation, the better the S&P did a month later.

Looking at the various types of operations, the most impact seemed to be with Coupon Purchases (listed as "Outright Treasury Coupon Purchase" on the Fed's website). And the most positive of all were large Coupon Purchases – if the operation was greater than $3.5 billion on those days, a month later, the S&P 500 was positive 89% of the time (33 out of 37 days) with a median return of +3.4%.

Looking at the Fed's website, it looks like that's exactly what we're in store for during the coming weeks.

It's exceptionally difficult for me to rely on data like this for trading decisions. Citing conspiracy theories for the basis of trades smacks of desperation. But it's hard to argue with the data above, and the unusual way in which the market has been behaving.

Whether you believe in Fed conspiracies or not, the numbers here don't lie. The government has an unlimited amount of money at its disposal if it wants to boost asset prices. Keep this in mind when trading over the coming months.

Regards,

Jason Goepfert

Steve's note: If you're not familiar with the work Jason Goepfert does over at SentimenTrader, you really should check it out. With original commentary and easy-to-read charts, Jason gives some of the most thorough analysis of market sentiment you can find anywhere. I follow Jason's site closely... It's my go-to site for sentiment.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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Comments

George Szele
17 Oct 10, 21:24
POMO days

Which is the POMO day ? The day of operation or the day of settlement ??


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