I haven’t shown an updated POMO chart on the blog in a while, and with QE2 now in the rearview mirror for the calculations I thought readers might find it interesting.
POMO stands for Permanent Open Market Operations and it is how the Fed goes into the open market to buy securities. The net effect of this buying is an influx of cash into the system. It appears a portion of that cash makes its way to the stock market and works as a bullish influence. A “POMO Day” is simply a day where these operations take place. The chart below shows my POMO Volume indicator. The top pane is the S&P 500. The bottom pane is the total amount of money infused into the system (POMO buying) over the previous 20 days.
The obvious takeaway here is that periods of heightened POMO buying have led to strong stock market rallies. Periods of weak or negative stimulus have been followed by market drops. This chart only goes back to 2008. For a longer view back to 2005 you may use the link below.
Looking at the far right side of the chart you can see POMO volume has dipped substantially since the end of QE2 (end of June). It has now reached a level where it is expected to be maintained for the foreseeable future. In the past when POMO stimulus ended – it ended. This time the end of QE2 has led to a period of substantially less stimulus, rather than none. This made it tricky in determining whether the end of QE2 would be followed by a sharp market drop. (It was.) While there IS still liquidity pumping going on, it appears the reduced level is akin to providing a heroin addict a couple of aspirin to try and get high.
The link below shows the POMO activity schedule on the Fed’s website.
If you click it you will notice there is a tab on the page where you can see “All Schedules” rather than just the “Current Schedule”. Clicking that tab you will see that the monthly estimate of POMO activity for last month and this month is about $14 billion. During QE2 the level was normally around $100 billion/month. So is the market capable of mounting a serious new bull move with the modest amount of stimulus currently being provided? So far I have seen no evidence of that, but I suspect it could if it starts from a “low enough” level…