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Every Day the Fed Allows Bond to Mature in QT, the S&P 500 Falls

The Macro Tourist  ( Original )
MAY 16, 2018

When Kevin Muir used to trade the S&P 500, he identified how Fed QE buying very directly affected the stock market. Not in some esoteric, debatable, tangential way, either. They pre-announced the days they'd be active in the markets. And huge bids popped up on those days, over and over.

Now the Fed is allowing bonds to mature without replacing them via QT. And sure enough, so far, the effects are direct and predictable.

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.

I know it seems crazy, but the Federal Reserve’s bond buying had a direct and immediate effect on the stock market. I don’t know why the relationship would be so unequivocal, but I learned the hard way not to fight the Fed on days when they pulled out the blue tickets in the bond market. I even tracked the amount of bond buying versus the stock market outperformance to make sure it wasn’t all in my head. Sure enough, the larger the bond buys, the bigger the outperformance.

Fast forward to today. Although the Federal Reserve has a broad schedule for winding down their balance sheet, they are not systematically selling off their portfolio.

The next big maturity day is May 31st. On that day we get almost $29 billion maturing on month-end. Watch out below.

For those that want to play along at home, here is the link for the Federal Reserve’s portfolio. I will leave it to all the efficient market theorists to buy on those days. I’ll be pulling out the pink tickets.

ORIGINAL SOURCE: PINK TICKETS ON QT DAYS by Kevin Muir at The Macro Tourist on 5/15/18