Short-term Outlook (1-5 Days):  Neutral (from 10/13 at 118.50)

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Equity Indicators - Updates and Extremes

Federal Reserve Permanent Open Market Operations

Anyone who's read this site over the past 9 years knows that I'm not a conspiracy theorist.  Out of the approximately 2,500 comments posted, I've alluded to market manipulation probably less 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 the work.

But I'll be perfectly honest here - I'm starting to crack.  It's not just because the latest setup has failed to comply with extremely high-probability odds.  It's that trading patterns during the day, especially lately, are not what we've typically seen in the past.

Yesterday is a perfect example - we were seeing persistently weak readings in the NYSE TICK indicator (meaning that 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 turn into some Zero Hedge wannabe who looks at every tick 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 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%.

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.

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