Don't Fight The Fed!

Something every investor/trader needs to be watching and following are the current inflows of liquidity(money) coming into the stock market via the Federal Reserve; tracking the Fed's POMO Buy and Sell days is extremely helpful for traders. In early 2012, the Federal Reserve launched a stimulus program called Operation Twist. Operation Twist basically was the purchase and sale of long and short term bonds designed to keep interest rates near zero for borrowers. The reason we were interested in Operation Twist is because there was a direct correlation with the reaction in the markets with the actions of the Fed. They would have certain days during the month that they would be buying treasury bonds and the stock markets would get this boost to the upside. On days where they would sell treasury bonds, the stock markets would be weaker and have more selling pressure.

Operation Twist ended on Dec 31st 2012, but the Fed has moved forward with a similar program. The new program is essentially Operation Twist without the Twist, meaning they are only buying bonds now and not selling any to balance. What this creates is a flush of liquidity into the markets with zero selling pressure to counteract its effect. You see, with Operation Twist roughly 3/4 of the days would be "Buy" operations and 1/4 would be "Sell" operations. This would create a positive effect on the markets, but it would end up muted because of the Sell days. However if you looked at the POMO schedule released by the Fed (here), you would know when the Buy days and Sell days were planned. This allowed us to position around the Buy days and consider taking profits before large Sell days. 

With the latest program in place it is simply a matter of looking to see how much is coming into the market in any given day; they have small purchase days and large purchase days. What this creates in the market is an environment where it is difficult to see any sustained selling pressure on stocks. The liquidity programs are designed to "buy the dips" and will look to put the money to work on most any pullbacks. Needless to say, this is extremely bullish for stocks and until this is ended or slowed, it will be a very good wave for us to ride. To put this new wave of liquidity in perspective, during Operation Twist the Fed was Buying roughly $20 Billion more treasuries than they were selling, creating a net $20 Billion injection into the markets per month. The new plan has the Fed purchasing just about $85 Billion per month with zero selling. That's 4 times as much liquidity and we are seeing the direct impact on the markets. Until this stimulus stops, we need to be aligned with it. Don't fight the Fed! its a cliche now, but it is absolutely the case.

It is so simple to follow the buy operations. All you need to do is click the link above and you will be taken to the New York Fed webpage into their "permanent open market operations" schedule.

It will be to your detriment if you aren't taking advantage of this opportunity that is being presented here. For example Thursday and Friday this week are "Large" buy days and would be a great opportunity to snag some of that free cash out there. Thank you Ben Bernanke!