By Joseph Morrison
Overview
As was noted in a previous article, the upwards movement in this stock market seems irrational particularly in light of the poor economic data from the week of 1/28/13. There has, however been a correlation between the Federal Reserve's Permanent Open Market Operation [POMO] and the parabolic rise in the equities market. This is therefore working according to design as investors are pushed away from the safety of United States debt into equities and other investments due to the low interest rates U.S. debt is offering. As the indices push higher on this Fed inflation, the question emerges as to how to attempt to take advantage of it.
POMO's Market Effects
First, we must test this hypothesis and look for data correlations to support these claims that the Federal Reserve's asset purchasing program is causing equities to rise. According to the Federal Reserve Bank of New York, the POMO began on August 17, 2010. Since the beginning of the Fed's POMO, there have been 481 days where the Fed took action and the Dow Jones Industrial Average (DIA) has closed up or stayed flat 54.47% of those days and the S&P 500 (SPY) 55.09% of those days (All data through 2/1/13).
DJIA Totals | ||
Positive or Flat Days | 262 | 54.47% |
Negative Days | 219 | 45.53% |
Sum of Fed POMO Days | 481 | |
Purchase Only Days | 399 | 82.95% |
Days With Sales | 82 | 17.05% |
Sum | 481 | |
S&P Totals | ||
Positive or Flat Days | 265 | 55.09% |
Negative Days | 216 | 44.91% |
Sum of Fed POMO Days | 481 | |
Purchase Only Days | 399 | 82.95% |
Days With Sales | 82 | 17.05% |
Sum | 481 | |
Since the beginning of 2012, the correlation has weakened slightly with the DJIA closing flat or positive 52.05% of the POMO days and the S&P 500 closing flat or positive 54.03% on those days.
DJIA Totals | ||
Positive or Flat Days | 129 | 52.02% |
Negative Days | 119 | 47.98% |
Sum of Fed POMO Days | 248 | |
Purchase Only Days | 182 | 73.39% |
Days With Sales | 66 | 26.61% |
Sum | 248 | |
S&P Totals | ||
Positive of Flat Days | 134 | 54.03% |
Negative Days | 114 | 45.97% |
Sum of Fed POMO Days | 248 | |
Purchase Only Days | 182 | 73.39% |
Days With Sales | 66 | 26.61% |
Sum | 248 | |
Stock Correlations
These indices are a collection of stocks which are supposed to provide insight as to where the stock market is. In order to now figure out exactly what POMO is impacting, an analysis is required to look for greater correlations which may lead to outsized investing gains when used in conjunction with the Fed POMO schedule. The first analysis evaluates each stock of the Dow Jones 30 against the index. Seven stocks beat the DJIA on POMO buying days both since the start of the program as well as since 2012. These stocks are 3M (MMM), Chevron (CVX), Exxon (XOM), Home Depot (HD), Pfizer (PFE), United Health (UNH), and Wal-Mart (WMT). Below are the tables with the data from the stocks which beat the index both since POMO began and since 2012.
MMM Since POMO Start | MMM POMO Days 2012-13 | ||||
Positive Days | 256 | 53.22% | Positive Days | 137 | 55.24% |
Negative Days | 225 | 46.78% | Negative Days | 111 | 44.76% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 220 | 55.14% | Stock Positive on Fed Buying Only | 106 | 58.24% |
Stock Negative on Fed Buying Only | 179 | 44.86% | Stock Negative on Fed Buying Only | 76 | 41.76% |
Stock Positive on Fed Selling Only | 30 | 42.25% | Stock Positive on Fed Selling Only | 25 | 43.86% |
Stock Negative on Fed Selling Only | 41 | 57.75% | Stock Negative on Fed Selling Only | 32 | 56.14% |
Stock Positive on Mixed | 6 | 54.55% | Stock Positive on Mixed | 6 | 66.67% |
Stock Negative on Mixed | 5 | 45.45% | Stock Negative on Mixed | 3 | 33.33% |
CVX Since POMO Start | CVX POMO Days 2012-13 | ||||
Positive Days | 268 | 55.72% | Positive Days | 137 | 55.24% |
Negative Days | 213 | 44.28% | Negative Days | 111 | 44.76% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 226 | 56.64% | Stock Positive on Fed Buying Only | 102 | 56.04% |
Stock Negative on Fed Buying Only | 173 | 43.36% | Stock Negative on Fed Buying Only | 80 | 43.96% |
Stock Positive on Fed Selling Only | 38 | 53.52% | Stock Positive on Fed Selling Only | 31 | 54.39% |
Stock Negative on Fed Selling Only | 33 | 46.48% | Stock Negative on Fed Selling Only | 26 | 45.61% |
Stock Positive on Mixed | 4 | 36.36% | Stock Positive on Mixed | 4 | 44.44% |
Stock Negative on Mixed | 7 | 63.64% | Stock Negative on Mixed | 5 | 55.56% |
XOM Since POMO Start | XOM POMO Days 2012-13 | ||||
Positive Days | 272 | 56.55% | Positive Days | 137 | 55.24% |
Negative Days | 209 | 43.45% | Negative Days | 111 | 44.76% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 225 | 56.39% | Stock Positive on Fed Buying Only | 101 | 55.49% |
Stock Negative on Fed Buying Only | 174 | 43.61% | Stock Negative on Fed Buying Only | 81 | 44.51% |
Stock Positive on Fed Selling Only | 41 | 57.75% | Stock Positive on Fed Selling Only | 31 | 54.39% |
Stock Negative on Fed Selling Only | 30 | 42.25% | Stock Negative on Fed Selling Only | 26 | 45.61% |
Stock Positive on Mixed | 5 | 45.45% | Stock Positive on Mixed | 5 | 55.56% |
Stock Negative on Mixed | 6 | 54.55% | Stock Negative on Mixed | 4 | 44.44% |
HD Since POMO Start | HD POMO Days 2012-13 | ||||
Positive Days | 267 | 55.51% | Positive Days | 141 | 56.85% |
Negative Days | 214 | 44.49% | Negative Days | 107 | 43.15% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 219 | 54.89% | Stock Positive on Fed Buying Only | 101 | 55.49% |
Stock Negative on Fed Buying Only | 180 | 45.11% | Stock Negative on Fed Buying Only | 81 | 44.51% |
Stock Positive on Fed Selling Only | 44 | 61.97% | Stock Positive on Fed Selling Only | 37 | 64.91% |
Stock Negative on Fed Selling Only | 27 | 38.03% | Stock Negative on Fed Selling Only | 20 | 35.09% |
Stock Positive on Mixed | 4 | 36.36% | Stock Positive on Mixed | 3 | 33.33% |
Stock Negative on Mixed | 7 | 63.64% | Stock Negative on Mixed | 6 | 66.67% |
PFE Since POMO Start | PFE POMO Days 2012-13 | ||||
Positive Days | 267 | 55.51% | Positive Days | 133 | 53.63% |
Negative Days | 214 | 44.49% | Negative Days | 115 | 46.37% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 219 | 54.89% | Stock Positive on Fed Buying Only | 99 | 54.40% |
Stock Negative on Fed Buying Only | 180 | 45.11% | Stock Negative on Fed Buying Only | 83 | 45.60% |
Stock Positive on Fed Selling Only | 44 | 61.97% | Stock Positive on Fed Selling Only | 27 | 47.37% |
Stock Negative on Fed Selling Only | 27 | 38.03% | Stock Negative on Fed Selling Only | 30 | 52.63% |
Stock Positive on Mixed | 4 | 36.36% | Stock Positive on Mixed | 7 | 77.78% |
Stock Negative on Mixed | 7 | 63.64% | Stock Negative on Mixed | 2 | 22.22% |
UNH Since POMO Start | UNH POMO Days 2012-13 | ||||
Positive Days | 263 | 54.68% | Positive Days | 139 | 56.05% |
Negative Days | 218 | 45.32% | Negative Days | 109 | 43.95% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 222 | 55.64% | Stock Positive on Fed Buying Only | 105 | 57.69% |
Stock Negative on Fed Buying Only | 177 | 44.36% | Stock Negative on Fed Buying Only | 77 | 42.31% |
Stock Positive on Fed Selling Only | 35 | 49.30% | Stock Positive on Fed Selling Only | 29 | 50.88% |
Stock Negative on Fed Selling Only | 36 | 50.70% | Stock Negative on Fed Selling Only | 28 | 49.12% |
Stock Positive on Mixed | 5 | 45.45% | Stock Positive on Mixed | 5 | 55.56% |
Stock Negative on Mixed | 6 | 54.55% | Stock Negative on Mixed | 4 | 44.44% |
WMT Since POMO Start | WMT POMO Days 2012-13 | ||||
Positive Days | 265 | 55.09% | Positive Days | 141 | 56.85% |
Negative Days | 216 | 44.91% | Negative Days | 107 | 43.15% |
Sum of Fed POMO Days | 481 | Sum of Fed POMO Days | 248 | ||
Stock Positive on Fed Buying Only | 223 | 55.89% | Stock Positive on Fed Buying Only | 106 | 58.24% |
Stock Negative on Fed Buying Only | 176 | 44.11% | Stock Negative on Fed Buying Only | 76 | 41.76% |
Stock Positive on Fed Selling Only | 37 | 52.11% | Stock Positive on Fed Selling Only | 30 | 52.63% |
Stock Negative on Fed Selling Only | 34 | 47.89% | Stock Negative on Fed Selling Only | 27 | 47.37% |
Stock Positive on Mixed | 5 | 45.45% | Stock Positive on Mixed | 5 | 55.56% |
Stock Negative on Mixed | 6 | 54.55% | Stock Negative on Mixed | 4 | 44.44% |
These stocks of the Dow Jones Industrial Average have shown to beat the index average on the days which the Federal Reserve is purchasing assets, therefore, I do not recommend shorting these stocks on these days, rather I would look to go long these stocks on these days.
Turning to the S&P 500, this analysis will highlight sectors and leave out the stocks already covered in the DJIA analysis. There were no stocks in the materials or utilities sector which beat the S&P 500 in this analysis. In the energy sector, the only stocks which beat the S&P 500 index were the same two which beat the DJIA, Exxon and Chevron.
Simon Properties (SPG) and Ameriprise Financial (AMP) were the two stocks in the financial sector which beat the index. In addition to the industrials which beat the DJIA, General Dynamics (GD) and Roper Industries (ROP) beat the S&P 500 in this analysis. Accenture (ACN), Adobe (ADBE), and Fiserv (FISV) are the companies in the technology sector which have had more positive days on Fed POMO days than t he S&P 500. In addition to Wal-Mart, Costco (COST), Coca-Cola Enterprises (CCE), and McCormick (MKC) are the consumer staples which beat the S&P 500 in this analysis. Pfizer and UNH were the leaders in the healthcare sector of the DJIA and they are joined by Amgen (AMGN), Biogen (BIIB), Allergan (AGN), McKesson (MCK), Becton Dickinson & Co. (BDX), St. Jude Medical (STJ), and Patterson Cos. (PDCO) to beat the S&P 500. The last sector is consumer discretionary which Home Depot beat in the DJIA and TJX Companies (TJX), Omnicom Group (OMC), O'Reilly Automotive (ORLY), and Gap Stores (GPS) join in to beat the S&P 500.
Below is a chart of these stocks which have beaten the S&P 500 arranged by the percentage of times which the stock on gone up on Fed POMO buying days since the beginning of the operation.
Company | Ticker | Beginning | 2012-2013 |
Amgen Inc | AMGN | 58.65 | 63.19 |
Fiserv Inc | FISV | 57.89 | 62.09 |
Allergan Inc | AGN | 57.14 | 57.69 |
St Jude Medical Inc | STJ | 56.89 | 57.14 |
Accenture plc | ACN | 56.89 | 58.79 |
Becton Dickinson & Co | BDX | 56.64 | 60.99 |
Exxon Mobil Corp | XOM | 56.39 | 55.49 |
McKesson Corp | MCK | 56.39 | 59.34 |
O'REILLY AUTOMOTIVE | ORLY | 56.14 | 55.49 |
Gap Inc | GPS | 56.14 | 56.59 |
OMNICOM GROUP | OMC | 55.89 | 57.69 |
WAL-MART STORES | WMT | 55.89 | 58.24 |
SIMON PROPERTY GROUP | SPG | 55.64 | 54.95 |
Chevron Corp | CVX | 55.64 | 56.04 |
United Health Group Inc | UNH | 55.64 | 57.69 |
McCormick & Co | MKC | 55.64 | 58.24 |
Pfizer Inc | PFE | 55.39 | 54.4 |
TJX Cos Inc | TJX | 55.39 | 54.4 |
Roper Industries Inc | ROP | 55.39 | 56.04 |
COSTCO WHOLESALE CORP | COST | 55.39 | 56.04 |
Adobe Systems Inc | ADBE | 55.39 | 60.99 |
GENERAL DYNAMICS | GD | 55.14 | 54.95 |
Patterson Cos Inc | PDCO | 55.14 | 56.04 |
COCA-COLA ENTERPRISES | CCE | 55.14 | 56.59 |
Biogen Idec Inc | BIIB | 55.14 | 56.59 |
Ameriprise Financial Inc | AMP | 55.14 | 57.14 |
3M Co | MMM | 55.14 | 58.24 |
Home Depot Inc | HD | 54.89 | 55.49 |
Conclusion
There are correlations between the Fed's bond buying and impacts on individual stocks on the day of the purchase. There is no causal relationship to be found, but that does not make this analysis any less valid. If an investor is aware of something that has occurred in individual stocks in relation to certain events, it can be used to make future decisions. If the Federal Reserve's actions are taken into account by an investor, these are the stocks that have had greater buying when the Fed is buying. As a result, this is where an investor may look to go long on Fed POMO buying days. At the very least, however, an investor should not be shorting these stocks on these days as the past statistics are not in favor of that action.
The schedule of Federal Reserve POMO actions are released monthly by the New York Federal Reserve and this can be used in conjunction with this study as a basis for future action.
Business relationship disclosure: The article has been written by Wall Street Trading, a group of junior market analysts. Wall Street Trading is not receiving compensation for it (other than from Seeking Alpha). Wall Street Trading has no business relationship with any company whose stock is mentioned in this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
