By Kevin Muir
I know I have told this story before, but it bears repeating. Way back in 2011 I was watching the S&P like a hawk. Trading each squiggle, I tried to understand what was driving the markets at every point. I focused on technical levels, monitored the news and spent way too long staring at the screens.
But on some days, the stock market would get mysteriously strong. It would usually occur mid-morning. Often stocks would sag near the open, look like they wanted to break lower, when all of a sudden – out of the blue – stocks would go bid. I couldn’t understand it. There was no “reason” why they should be rising. Yet they did.
It took me a while, but eventually, I figured it out.
Although it flies directly in the face of Dr. Malkiel’s Random Walk Down Wall Street, the days when the Fed expanded their balance sheet through bond purchases resulted in outsized stock market gains. These bond buys were conducted through Permanent-Open-Market-Operations (POMO) and the great thing about a transparent Federal Reserve is that they listed the schedule in advance, so it was easy to measure the relationship between POMO operations and stock market performance.