Market pros will tell you that the Dow Jones Industrial Average last Thursday did one of the most bullish things any price measure can do: it made a new multi-year high.
There are various explanations behind the rebound in stock prices. For one, many investors believe that the US economy is now on the mend. Second, there have been a number of better-than-expected earnings reports from companies like Apple, Intel, Yahoo, IBM and United Technologies, which has motivated you and your neighbors to bid up stock prices.
However, Tom McClellan, a veteran technical analyst and editor of The McClellan Market Report, offers another reason for the advance: the Federal Reserve keeps on printing more money and pushing it into the banking system through Permanent Open Market Operations (POMOs), or the Fed’s program of T-Bond buying.
This is a bullish factor for the market. As McClellan explains, the Fed takes bonds out of the hands of the big banks and gives them cash. That cash then has to go somewhere, so it works its way into the economy. “It gets to the economy by way of the stock market,” says McClellan. “More cash in the banking system means more liquidity to drive up stock prices.”
To chart the impact of this money printing, McClellan recently looked at the 5-day trailing sum of POMOS over the past 5 days. If you were to divide this number by 5, it would be a 5-day simple moving average.
One interesting finding from looking at it this way, says the analyst, is that the stock market tends to race upward faster if the POMOs have been big in recent days. The March 16 bottom that we all figured was due to the disaster in Japan, says McClellan, just happened to coincide with a drought in the Fed’s POMOs. Last week’s rebound in the S&P 500 matched an upsurge in POMOs.
The Fed publishes a list of its intended T-Bond purchases, which can be viewed here. Our trusty policymakers list a range of values, such as $6-$8 billion on April 25 and $1.5-$2.5 billion on April 26.
So McClellan, using the mid values of these ranges, projects what this line will look like in the sessions ahead. As the chart below highlights, it suggests a dip this week and then a big upsurge again.
Click to enlarge
The implication, says McClellan, is that we might see some consolidation of recent gains early this week, but there are still more gains to come for the stock market courtesy of the Fed’s money pumping efforts.
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