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Cont'd from archive: POMO Oscillator
Below is the simple ratio of the Stockcharts.com NYSE Bullish Percent Ratio ($BPNYA) divided by the share price of the TLT long-dated US Treasury ETF through today, which I referred to as a "POMO Oscillator" in a previous VIT post [post=10975]here.[/post]
It shows the two lowest dips in the ratio during POMO-active regimes, in July 2009, and Feb 2010.
[INDENT](To repeat for those who may have missed this first time around - the ratio is not intended as a trading tool per se - our hosts here have that covered - but as a diagnostic for revealing market acceptance or rejection of FED Large-Scale Asset Purchase Program ("POMO") induced asset substitution effects which many believe have resulted in over-pricing of US equities in general. The search for the ratio was inspired by the practical math and active boundary concepts of Pascal's book. POMO-active periods are revealed to indulge price-to-perfection equity/long bond price behavior, represented by a bouncing-off-of-0.91 topping of this ratio, similar to an upper active boundary; while POMO-dormant periods have been erratic around the 0.40-0.60 AB-like band.)
[/INDENT]
The ratio is approaching the first of its previous lower test levels, at 0.69. Its utility in diagnosing POMO-induced behavior would be strengthened if the 0.69 level first, or the band between it and the 0.56 level second, were to hold as support, followed by a return, however jagged or direct, to the 0.91 upper boundary. If both levels are broken downward, it would suggest that POMO-induced asset substitution effects were being unwound early - an important pre-cursor to a longer period of POMO-off volatility for equities which would likely persist until the FED signals toward some kind of QE3, or US macro data returns to significant positive surprise levels.
[I]As an aside to our hosts, the new forum tools and features are far superior to Google's (no offense to employees or investors of GOOG); the system response is superb, and the structure makes perfect sense. Also I'm net long with TZA (3X short $RUT), in agreement with the robot. Thanks for all this work. Well done.[/I]
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The last POMO support level
In retrospect, determining the end of the POMO effect did not require any additional indicators than price. The POMO oscillator has now reached its all-POMO-on low. There is some reason to suspect we may get a bounce in equities next week, being OpEx and playing for max pain, but the Bullish% and TLT are telegraphing that the end of POMO, coincidentally timed with the lowest negative economic surprise index readings since 2009, herald the return of the long beta-blockers / short dexadrine convergence trade:
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and a link to the same:
http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=2&mn=0&dy=0&id=p96249539740
CESIUS:IND, via Bloomberg:
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and its link: [url]http://www.bloomberg.com/apps/quote?ticker=CESIUS:IND#chart[/url]
In closing, a POMO-effect thought experiment. The descent since May 2 has been remarkably controlled. In a highly simplified variation of Bob's Reverse VWAP, imagine what the SPX chart would look like if the last buyers in were the first sellers out. Here is a non-technical imagery experiment showing the SPX from 9/1/2010 to 5/2/2011, but mirror-inverted. Overlaying it, is the SPX in regular time sequence since May 2, slightly elevated in the vertical to make the candles visible.
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