POMO Update

This can certainly have some short term influence for a bounce. This is from today's McClellan Daily Newsletter:

"One explanation for why the market has dipped may be what the Fed is doing with its Permanent Open Market Operations (POMOs). Those are continuing as an extension of the Operation Twist purchases and sales of Treasury securities, although the Fed has not yet started rolling in the planned purchases of mortgage backed securities that we heard about after the Sep. 12-13 FOMC meeting.
The chart shows an indicator that I developed after a lot of tinkering with the POMO data. It has been known since long before Operation Twist began that the days of the Fed’s POMOs seemed to matter in terms of bringing an up market, and the operating theory is that the addition of extra money into the banking system helped provide a boost for stock prices. But that gets a little bit tougher to track when there are POMOs nearly every day, some with the Fed buying and some with the Fed selling.
There also seemed to be a bit of a lag effect in the data when I first investigated it, as if the money could not all flow into the system at once, so I played around with different smoothing methods. A four-day lookback seemed to work really well to explain a lot of the price movement, but then I had to shift that forward by 2 trading days to take out that lag.
Fortunately, the Federal Reserve publishes a schedule ahead of time, telling us what they are planning to do with these POMOs up to a month out. The red line in the chart above shows the projected net purchases or sales out through the end of October, which is when the next set of projected purchases and sales will be announced.
We can see in this chart that the recent dip came during a four-day period when there were two separate sales of $7.8 billion each, versus just one purchase of $1.9 billion. Now we are heading into a period of more net purchases, which should provide a boost to stock prices.
One big anomaly in the chart came in mid-September, after that FOMC announcement of the new $40 billion per month program of additional MBS purchases. The rally in the SP500 which ensued was not modeled by this indicator, which was saying that there should have instead been a dip in mid-September. So the public’s reaction to that announcement bent the SP500 higher in ways that were not projected by this indicator, nor by my eurodollar COT leading indicator. And following that pop, the market has had to work to get the train back on the tracks after veering off course.
If the SP500 and DJIA are unwilling or unable to drop below their rising bottoms lines, then the elastic forces from the recent oversold condition should combine with $11.7 billion of POMO purchases due over the next 3 trading days. How the stock market responds to that, and whether it can accomplish things like turning the Price Oscillators up and getting the McClellan A-D Oscillator back above zero, will govern how I will view the market going forward."

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