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Is the Fed Juicing the Market?

There is speculation that the Fed is behind a false rally


In the world of investing, the outlook doesn’t necessarily match the performance. Yesterday stocks rose in the face of consumer confidence numbers that took a drop to seven-month lows.

The index from the central Atlantic region shows that the economy remains weak. But rather than having a negative impact on the market, stocks rallied on the hope that the report would force the Fed to embark on new programs to support the economy. 

The health care sector led all other sectors with Walgreen Company (NYSE: WAG) the best performer of the day. Better-than-expected earnings from the giant drug store chain helped pop the stock for a gain of 11%. 

The worst performer of the day was Monsanto Company (NYSE: MON), which fell 8.14% on news that its Australian subsidiary was underperforming and questions about the company’s seed products.

In Europe, the costs of supporting the Irish banking system resulted in lower stock prices. The threat of another round of ratings downgrades followed warnings from S&P that the cost to recapitalize the Anglo Irish Bank could exceed $47 million.

Despite the Irish debt problem, the euro rose against the U.S. dollar to $1.3571 due to a higher-than-expected increase in German consumer confidence. 

At the close, the Dow Jones Industrial Average rose 46 points to 10,858, the S&P 500 gained 6 points to 1,148, and the Nasdaq gained 10 points at 2,380. 

The NYSE traded just over 1 billion shares with advancers over decliners by 2.4-to-1. The Nasdaq exchanged 626 million shares with advancers up by over 2-to-1.

Crude oil for November delivery fell 34 cents to $76.18 a barrel on worries that demand for energy products could create an oversupply due to the falling consumer sentiment numbers. The Energy Select Sector SPDR (NYSE: XLE) rose 39 cents to $55.45.

September gold rose to a record $1,306.60 an ounce, up $9.90, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) closed at 199.31, up 3.79 points.

What the Markets Are Saying

Even though stocks made modest gains yesterday, a quick burst of profit-taking reduced the impact of a late-afternoon charge by the bulls. Low volume was again an issue and is being highlighted in market discussions as one expert after another appears confounded by the lack of institutional participation.

The volume issue is especially perplexing as the third quarter comes to a close. Fund managers usually scramble to be invested if they are underinvested causing stocks to rise at the end of a quarter. They are sensitive to holding hordes of cash since they are paid to achieve results in equities. 

Nevertheless, upside volume is light and continues to lag downside volume. This is troubling because the implication of higher downside volume is that the bears are still in control and that the current rally may be doomed to fail.

Yesterday, an article on Seeking Alpha titled, “The Only Reason Stocks Have Rallied This Month,” was brought to my attention by a reader in the Netherlands. It points out that the Fed is pumping money into Wall Street through its Permanent Open Market Operations (POMO). This operation allows the Fed to buy Treasuries from primary dealers (Goldman Sachs, JPMorgan, Bank of America, Credit Suisse, etc.) with interest from maturing securities without directly issuing new debt. The dealers then take this money and plow it into stocks, which in a low-volume situation with few sellers and even fewer buyers creates a run on stocks on low-volume days.

The article says the market is “being juiced higher, plain and simple.” And with other indicators negative, those who buy into this “farce of a rally are going to get what’s coming to them.”

I have little insight as to the authenticity of the article; however, the anemic volume coupled with hyper volatility is puzzling and does appear to point to a major source of funds that is unrealistically pushing stocks higher. It is also curious that the current push higher by stocks this month began on Wednesday, Sept. 15. The article points out that the Fed has usually injected cash into the system on options expiration weeks. September options expired on Friday, Sept. 17 … hmm.

Readers who have further insights on this or any other topic are invited to e-mail me directly at

For a sell alert, see the Trade of the Day.

Today’s Trading Landscape

Earnings to be reported before the opening include: Actuant, American Greetings and Family Dollar.

Earnings to be reported after the close include: Omnova Solutions, Synnex, Worthington and Xyratex.

Economic reports due: MBA purchase applications, EIA petroleum status report and farm prices.

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