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Is The Fed Buying Stocks?

Jan. 11, 2015 3:39 AM ETDIA, SPY, QQQ, IWM50 Comments


  • Sudden and swift declines in the stock market have become a more regular occurrence.
  • The recoveries from these declines are just as rapid, which does not characterize typical investor behavior.
  • It appears as though there is an outside force, with motives consistent with those of the Federal Reserve, that is supporting market prices.
  • The short-term benefits of manipulation that leads to wealth creation, should it be occurring, destroys the credibility of our markets, and ultimately leads to wealth destruction.

These are extraordinary times. These are times when central banks are taking unprecedented measures to revive our economy. So I suppose it should come as no surprise that we might see unprecedented and extra ordinary price activity in our stock market.

During each of the four quarters of 2014 we had one very abrupt decline in the stock market. On each occasion the S&P 500 (SPY) fell approximately 100 points (5%), with the exception being the October decline of 200 points (nearly 10%). The fifth and most recent decline started on December 30, 2014, and ended five trading days later after the S&P 500 had fallen nearly 100 points to its intraday low on January 6. Each sell off was truly breathtaking in terms of its speed and ferocity in relation to the unusually low levels of volatility that preceded it.

What was extra ordinary in each instance was the recovery in the benchmark indices that followed. The market would halt its decline on a dime, then immediately reverse course and recover all of the lost ground with the same speed that characterized the decline. In my 22 years of market observation, I have never seen such powerful and immediate recoveries on a recurring basis. It does not typify normal market behavior, yet each time it happens I hear that it is the proverbial "money on the sidelines" coming back into the market, as investors see a buying opportunity. I find this hard to believe.

Often the majority of the gains during these market rebounds occur overnight in the futures market. In other words, if the S&P 500 index rallies 20 points each day for three consecutive days, the majority of those points manifest themselves between the prior day's close and the following day's open in the futures market. The cash market then adjusts

This article was written by

Lawrence Fuller profile picture

Lawrence is the publisher of The Portfolio Architect. He has been managing portfolios for individual investors for 30 years, starting his career as a Financial Consultant in 1993 with Merrill Lynch and working in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. In addition to writing for Seeking Alpha, he is also a Leader on the new fintech platform at Follow.co.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (50)

Elazar Advisors, LLC profile picture
The Nattering Naybob, thank you, kind words that I feel thru the PC. This isnt my page but I have a (newly implemented) rule that I need to understand what peoples names mean. can you share? Im sure inquiring minds want to knkow. I heard nice things about you so look to hear more. I dont follow anybody thru sa b/c my email already jammed, but i'll check u out on bookmark.
The Nattering Naybob profile picture
Elazar - "The Nattering Naybob, thank you, kind words that I feel thru the PC. This isnt my page but I have a (newly implemented) rule that I need to understand what peoples names mean. can you share?"

Our moniker, penned by William Safire, spoken by an inarticulate and later disgraced Agnew, comes from a distrust of big media, business, banks and brother. Keep it tween the ditches.
Elazar Advisors, LLC profile picture
got it, i really dont know so much, shows u how little i know. if you have something to send me more on it, send me. i care if its important enough for you to name ureself after an untrusted etc.
Elazar Advisors, LLC profile picture
Lawrence, I just noticed your article by the same title we did ours today. Let me know your thoughts. http://seekingalpha.co...
Just read your piece, nice work, nice take.
Lawrence Fuller profile picture
Will do, I have to re-read mine first, as i wrote it a year and half ago.
Elazar Advisors, LLC profile picture
u r an honest man. I like u already.
The Nattering Naybob profile picture
"u r an honest man. I like u already."

Roger that for the pair a ya.
Q1 2016 will witness the fourth consecutive quarter of earnings decline and there's no sign of a correlation between prices and earnings. The Fed's 'plunge protection' team keeping the bubble going for longer seems a credible theory, in an election year. The inevitable albeit delayed correction will be very severe, compared to 2000 and 2008.
Well said! Americans can now see what the US has been doing for years by watching the Chinese stock market! Does anyone truly believe for a minute that "Business / Stock value" has truly doubled with the prices?

My bathroom (no lie) is wall papered in worthless stock certificates from the period of 1929 through 1932!
theantiantihero profile picture
The Fed doesn't need to buy stocks. The money they print is going to go where it can find the highest return. A few years ago that was real estate, now it's equities. Although we are in a bull market, some days there is a sell-off and investors panic. The next day the market starts to rise so they jump back in. The moment a short-term trend starts to develop, most participants jump on the bandwagon.

Generally, asset inflation is great for the wealthy individuals who own most of the assets (and who contribute the most to political campaigns) so it's probably no coincidence that the Fed's monetary policy is propping up the market. Does that mean that they have also organized some secret cabal to buy when the market dips? Maybe. But Occam's Razor would seem to suggest that the buyers are simply investors trying to make money.
brianklu profile picture
Lawrence you are dead on. Problem is there is a agenda behind the agenda
and it is not to prop up our markets.
Japan is doing it. America is supporting it. It's a valid question. I hope the answer is no.
Boisedave profile picture
Some respondents above don't seem to regard it as a big deal if the Fed is buying directly into the stock market. I think it's a very big deal and I'd like to know for sure. I assume the only way we might find out is if major players were questioned under oath, say by a congressional committee.
Lawrence Fuller profile picture
Boisedave, don't hold out hope for congressional committee hearings if Goldman is involved, or any Wall Street bank for that matter. They are all professional liars and the member of Congress are just grandstanding for the public. That's why the televise the hearings.
Ted Waller profile picture
bil, I think you are right. It makes technicians look brilliant, and my experiences with tech analysis is that it works great until it doesn't and you are screwed. I think at this point it will take a major world event to change minds and break the pattern.
bil1026 profile picture
There is no direct or indirect Fed S&P trading.

Reality: there are 25 million funds, institutions, investors, and traders who buy the S&P index when it dips 5 to 10% (caused by Putin, ISIS, N/Korea, oil plunge, Boehner/McConnell/Yellin cluelessness, cyberscare, flashcrash, etc). And they sell when it hits the previous ATH to raise liquidity for the next inevitable "crisis."

That's what has been putting the floor on the dips and the brakes on the pops.
The Nattering Naybob profile picture

Spot on observations and piece. You reference collateral conversion. I will be issuing another missive, perhaps on the morrow, that correlates. Keep up the good work.
After reading the author's comments , it makes very good sense to me and other hedgefund managers out their ? We never seen the markets act this way, I believe the Fed has waaay to much power to manipulate the markets and other worldly markets to a degree!
And a lot of people like the comments above have their heads in the sand, n believe their government would never do such a thing! Shammmm on you? If you listen to the media and the talking heads nothing is wrong , follow the yellow brick (FED) believe us , we know it all?
Why is their so much cash sitting on the sidelines? Hmmmm?
Martin Vlcek profile picture
I think the phenomena described in the article (the markets generally rising outside of the regular trading hours have a very simple explanation that may not have anything to do with the FED. The explanation is the Bank of Japan, and the Japanese investment fund managers buying Japanese and U.S. ETFs. They are the big, consistent buyers, and naturally it happens during their regular trading hours, which would be overnight in U.S. market terms. The Japanese investment funds are rebalancing away from Japan to add more international exposure and away from fixed income into stocks to increase expected returns at the indirect and direct pressure from the Bank of Japan.
Lawrence Fuller profile picture
Martin, I agree that Japan is a buyer, but I don't see how rolling S&P 500 futures would fall in line with their objectives.
The motivation for the BoJ being an indirect buyer of US Stocks is two fold:

1. Toshiba, Sony, Panasonic (Japanese consumer electronic corporations) derive much of their revenue from trade in the USA. Same can be said of Japan's automotive industry (Honda, Nissan, etc.) If that revenue stream dwindles due to a slowdown in the USA economy ... the above Japanese companies will plunge as well.

2. The Japanese gov't owns a substantial portion of US Treasury debt. If that US debt looses value then the Japanese gov't will be forced to take a loss as well.

You could say that Japan's economy is joined at the hip with the US economy ... but Japanese style capitalism doesn't blend very well with 'American capitalism.' The same argument as above could be applied to China as well ... as China holds a large chunk of US Treasury debt. China's version of capitalism doesn't go far beyond the concept of exchanging money for goods. Both the Bank of Japan and the Bank of China print money in order to keep those in political power ... at the top of the economic ladder as well.
Martin Vlcek profile picture
Lawrence, ranclarke summed it up well below. I would add that the S&P futures markets (after forex and U.S. Treasuries) is probably the largest market out there. Japan needs to diversify as Yen devaluation and Japanese Treasury "restructuring" or default is one of the few real solutions available after decades of attempts with no results. I knew I was probably going to default on some of my debts, I would try to buy anything outside of Japan to save at least some value. Also, Japan offers low growth and the pension funds need higher income sources.

Japan is a huge buyer, the BOJ and Japanese investment funds together. I think they would created distortions if they actually tried to purchase single stocks or even some smaller ETFs. The FED (almost) created distortions by buying lots of U.S. Treasuries. I don't know how the SPY ETF compares to the S&P futures market in terms of size and liquidity, but I would guess the volumes are 100s-fold higher in the S&P futures and forex, futures and Treasuries are probably the only markets that can soak up as much demand as Japan represents.

During the 1987 20% one-day crash, what exacerbated the fall was the hedging done by virtually everyone by shorting the S&P futures If I remember correctly.
I have pondered the FED being a buyer in the stock market for a few years now. Why else would the FED have its own Private trading floor with 1100 full time employees?? Intervention and manipulation are the FEDs middle name. The Free Market where true price discovery is achieved has not really existed for a long time now. Why has there been no meaningful correction in the market since the crash? We are working on a 5+ yr run now..Perhaps someday the facts will be revealed..ultimately I think though Buffet has got it goin on. Even though it does seem quite possible if not probable I would not get to distracted with the FED and its games.
Ted Waller profile picture
Be careful, Lawrence. Conspiracy theories are a bad place to go in terms of reality. I think changes in markets like HF trading, proliferation of hedge funds, QE and ZIRP are a more than adequate explanation. Furthermore, Janet Yellen is much less oriented towards supporting the rich and is not nearly as likely to stop a market decline.

The interesting question is what happens eventually when whatever is causing this becomes inefffective. Even if it is a conspiracy there's nothing that says a conspiracy must always get its way.
Lawrence Fuller profile picture
Thanks Ted, always appreciate your feedback. No conspiracy theory here, simply asking the question and looking for answers. Perhaps it is just another HFT algorythm that backs up the truck on S&P emini futures when we pullback 5%. I have no idea. My primary concern, which you addressed, is what happens when this buyer doesn't show up. It seems as though we could fall 10% in as many days or a lot more. Liquidity appears and then vanishes so quickly these days.
This is just speculation. There is no proof and it doesn't make any sense. Has the author studied COT? I didn't think so. Sounds like one of those bears who had the conclusion first then look for arguments.
Lawrence Fuller profile picture
Speculation on my part? Yes
Proof? No, and I acknowledged that.
Criticizing raising the issue and asking questions? That makes no sense, as what I'm trying to do is understand an ever changing market structure and how it will ultimately impact markets and performance moving forward.
Mr Fuller wrote, "Is the Federal Reserve manipulating the stock market?"

My answer ... yes.

It does so by purchasing MBS and Tbills from the banks. The banks (JPM, C, WFC, BAC, etc) acting in unison then take this new money and pump up the stock market. The question is ... with the end of QE ... the above mentioned money to stock market pump should work in reverse. The stock market should correct. But bears be warned ... the banks may have enough 'saved funds' on hand to keep the market at this level for some time.

The permabull Democratic Socialists such as Larry Summers believe that low oil prices will rekindle the American consumer and thus keep the S&P above 2000 at least until 2016 ... for yet another Democratic Socialist president. If the Republicans desire to win the 2016 election ( if there is one) they need to induce a recession to sway the American voter back to the 'Republican side' of thinking. In order to do that all they have to do is convince a dozen Democratic Senators to vote 'yea' when it comes to impeaching King Obama for violating Article 1 Section 7 Clause 1 of the US Constitution.

The Federal Reserve cannot create money ( commonly called QE) in order to buy MBS and Tbills from the banks without a revenue bill passed by Congress. That is ... QE is a revenue bill which is originating at the Federal Reserve and which ends when Congress votes to raise the debt limit. Perhaps the Democrats should go about amending the US Constitution so Article 1 Section 7 Clause 1 is adjusted to read "some bills for raising revenue originate at the House of Representatives and other bills for raising revenue can originate at the Federal Reserve."

Then people like me would have the authority to complain and King Obama wouldn't have the ability to start WW III.
If all this behind the scenes conspiracy themes are occurring, why is the S&P P/E just a bit higher than historical valuation. Are the Feds also pumping profits into corps?
Hardog profile picture

I like your thinking and clarity of vision.
Lawrence Fuller profile picture
They are via 5 years of zero interest rate policy as corporations borrow 100s of billions to buy back stock and lower their cost of capital.
Retired Colonel profile picture
Thanks, Lawrence. As a prosecutor in my younger days, I learned never to put too much faith in "coincidence" as an explanation for events. But I have for a very long time seen the correlation between the Fed money machine and market movements. I don't think we've been told the whole story yet, but I hope we are someday. Maybe there's a book in it for somebody after they retire.
Constant Gardener profile picture
Since the Fed Reserve won't submit to an audit of their activities by Congress I assume anything and everything is possible. And why not support equity prices through the futures market since it's not like QE3 isn't extraordinary intervention in the functioning of our markets?

But here is my question - since plummeting oil prices (and also a rising dollar) will likely give the Feds quite a problem on their stated goal of pushing up inflation, why not get to the source of the problem and buy oil futures instead (and/or sell dollar index futures)? The COT reports show the usual increase in buying up of oil futures, but it's by large commercial producers, and it's consistent with averaging down their prices under these circumstances.

Still, thanks for the long term perspective - it's helpful to know I am not the only one amazed by the now fairly predictable market whipsaw.
Stephen Aniston profile picture
Is their goal to push up prices or asset inflation? It seems to me asset inflation is the goal. I mean pushing up CPI inflation is too politically unpalatable. The best of all worlds is to push stock prices higher while consumer prices stay the same.
Lawrence Fuller profile picture
Hi Constant Gardener,
Those large commercials in the oil futures market are speculators, using the Wall Street banks (considered commercials) as cover, to build their positions. You can't differentiate who is a true commercial producer/user and who is a institutional speculator anymore.
Lawrence Fuller profile picture
The Fed's inflation goal is a 2% CPI, intended to be achieved through incomes that are rising at the same or a higher annualized rate, BUT THEY HAVE FAILED. Evident in the last employment report. The reason is that the Fed still makes a connection between financial asset price inflation and job creation, and there is little to none.
Gedanknomist profile picture
The FED prints money that it uses to buy bonds from the government. Why should it be surprising that it does similar with the stock market?
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