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The Stock Market And POMO October 14, 2010
-------------------------------------------------------------------------------------------------------------------- This is an abbreviated sample of a comment posted for subscribers --------------------------------------------------------------------------------------------------------------------
Today I 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 they are going to buy and how much. Many are starting to believe that these funds wind their way through the system and end up in the stock market.
I'm not going to pretend that 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 using to prop up stock prices. I'm just going to take their data at face value and see what impact it has had on stocks.
So let's use the Fed's data on their 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 that the Fed does. The data begins in August 2005.
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, then 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, then 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%. Home | Commentary | Indicators | Models | Sectors | COT | Subscribe | About Us
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