“Don’t Fight the Fed” Has Never Been So True

The Fed's Treasury-buying can have a huge impact on trading

   

The Federal Open Market Committee (FOMC) is one of the most influential groups of people in Washington, D.C. Some would even argue that the FOMC — through its easy monetary policy and increased asset purchases — has single-handedly lifted the stock market out of the doldrums and pushed the S&P 500 to new all-time highs.

Thanks to the FOMC’s monthly purchase of $45 billion worth of U.S. Treasuries, the phrase “don’t fight the Fed” has never been so true. You can see this play out time and time again as you watch the Federal Reserve Bank of New York carry out the FOMC’s permanent open market operations (POMO).

Permanent Open Market Operations (POMO)

Each month, the New York Fed releases its Tentative Outright Treasury Operation Schedule for the coming month. You can see what April’s schedule looked like in Figure 1.

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This schedule tells investors not only the amount of Treasuries the Fed is looking to buy on a given day but also the time at which it is going to buy them — between 10:15 a.m. and 11:00 a.m. ET. We’ve highlighted the four days with the largest Treasury purchases.

To get an idea of the impact these purchases have on the market, take a look at the following charts. Let’s begin with the 5-minute chart of the S&P 500 Index on April 30 in Figure 2.

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You can see how the market rallied after the Fed’s Treasury purchases reassured Wall Street that the flow of funds from the Fed was still coming. You can see the same phenomenon on April 22 (see Figure 3).

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Of course, the Fed doesn’t always have the strength to turn the market around every day. Some days the negative news outweighs the good, but the Fed’s Treasury purchases still have an impact. You can see how the market slowed its descent and found some support while the New York Fed was completing its POMO on both April 15, as the market opened with gold prices plunging, a disappointing Chinese GDP announcement and investors reeling from the Boston bombing incident (see Figure 4) — and April 3, after a disappointing ADP Nonfarm Employment number (see Figure 5).

5 1 13 SST4 Dont Fight the Fed Has Never Been So True5 1 13 SST5 Dont Fight the Fed Has Never Been So True

As you can see, when the Fed is stepping in and buying a lot of Treasuries on a given day, it is bound to have an impact. Being aware of how the market reacts during and after the periods the Fed is buying can clue you in to whether the market is likely to continue rising or falling.

InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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