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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.

Source: Use The Fed POMO To Your Advantage