The collision of global markets and social mood

Wednesday, July 2, 2014

Clear Waves, Tight Stops, And How POMO Helps You Enjoy The Ride™

When the Fed administers two months of POMO in one day, as it did yesterday, why shouldn't the market go up. The market's performance has nothing to do with fundamentals. And it will continue to perform until the Fed's medicine lacks the desired effect.

At such times, all one can ask for is that the market give clear signals. This is one of those times.

From the 1944.69 lows of June 26th, there appears to be a developing impulse wave. Or better said, the developing wave has clear implications for stops.

The new stop yesterday was 1967.53. Now it is 1964.24 because it is cleaner and less ambiguous. Because the market turned down just before the Fibonacci target at 1979.55 which coincided with a trend line from April, a stop is a wonderful thing at this time.

There are still higher targets -- 1982.74 and 2002.20. As the market rises, the lower targets shift. They are now 1868.14-1886.65 and 1919.33-1921.78.

Permanent open market operations (POMO) are used by the Fed to add to the capital reserves available to the banking system.

The Fed buys Treasury securities from banks in exchange for cash. "On paper" the banks will then inject cash into the economy through loans. Yeah right . . . money velocity is near zero because so few are borrowing.

So, since the banks are basically hedge funds now, they speculate with the money. Which means they buy equities, options, FX carry trades, commodities, metals, softs, grains, live feeder cattle, gasoline futures.

POMO also holds down interest rates by creating an artificial demand for Treasuries. With low interest rates, companies can then borrow money to buy back their own stock.

It gets even better. When they buy back their stock, the amount of shares outstanding goes up. Therefore their EPS (earnings per share) goes up.

Wall Street and CNBC want us to think the markets are going higher because fundamentals are great. Ha.

Until your stops get hit, there is only one thing to do.

Enjoy the ride.™

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