Well the article is a bit long and there is some statistical jargon but the conclusion is that when the Fed intervenes in the markets within a cluster of dates, stock market returns have been skewed to the upside.
Here are the dates of the POMO operations
I think it's safe to conclude that you cannot fight the Fed! Also I wouldn't be surprised about how much front running goes on at all the major trading institutions when the Fed announces these kind of actions/dates. As a side note, I'm currently reading Liar's Poker by Michael Lewis. I'd highly recommend it for a really funny and realistic insight into the culture of the institutional trading world and how it operates. Hard to believe that the securitization of mortgages occurred way back in the 1980's (one of the main causes of the GFC)!
I would also keep the date of Nov 2-3 in mind as that is the next FOMC meeting and where everyone largely expects that the Fed will announce further expansion of its balance sheet (QE2). I would be weary of holding large positions in both bonds and stocks prior to this as a shock announcement (no QE2) could create some big volatility. I think it's fair to say though that the markets are pricing in another round of central bank stimulus. As a trader we should be thinking further ahead of the next wave. Most likely a big run up in gold as fiat currencies get devalued?? Also commodities look like a good inflation play. I think it's becoming increasingly evident that at some stage all this liquidity is going to drive the next boom. We here in Oz are already feeling the pinch because our central bank has hinted at raising rates in the near future and interest are already at 4.5%!!!
Safe trading everyone.
No comments:
Post a Comment