The 3:00 SP futures close was 1178.50. Stop SP futures at 1181.50. Stop 6% SDS at DJI 11,176.
POMO funds do not settle until the following day. The POMO effect is not from liquidity but from the psychological effect of the announcement. 2:00 magic hour is just an ingrained, self-reinforcing expectation. In other POMOs 2:00 saw the dollar, silver, and gold reacting along with the stock market. This time there was no effect in these markets. When the reaction becomes so tepid that even the stock market can't suck in traders then the game is up.
I haven't been a believer in POMO, not because I doubt the effect but because I follow the money. If the receipts were being plowed into the markets it would be perceived the following day.
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So you're saying that when the Fed buys Treasuries on POMO days, the banks that are selling the Treasuries cannot invest the money until the following day?
ReplyDeleteIf that's true, then we have a statistical improbability to explain: That every POMO day has resulted in the market closing up. You're explaining that by saying that the market is anticipating money coming into the market on the following day, so it closes up today in anticipation of that?
The effect is purely psychological.
ReplyDeleteI am not so sure. If banks sell Treasuries today, they could go ahead and use the funds today to buy stocks even though the sale won't settle till tomorrow. They could do this by using their reserves.
ReplyDelete(I am not a banker, but it seems like the banks could figure out a way to use the money from the sale of treasuries today, even though technically they don't settle until tomorrow.)
I am also suspicious of the purely psychological explanation because purely psychological phenomena in general do not have a 100 percent accuracy in term of predictive value which is something that POMO seems to be enjoying.
Gary
ReplyDeleteSo far the effect has been to stop a rally, not to turn it. DJI peaked last Wednesday and tested that today. I've looked backward and the behavior for I1 going below 0 is to start cracking from 2-4 days ahead. I1 goes negative Wednesday, so we are already in the zone.
but every day there was a POMO day did NOT result in the market being up pimaCanyon, I'd have to go back and look at the specific dates but when the market was in downtrend in august there were several down days that were POMO's.
ReplyDeletejust some quick digging:
ReplyDelete8/19 was a POMO, S&P cash closed down on the day, 8/24 was a POMO, also a lower close, same on 8/26
9/1 was a POMO, and also when people started stating that POMO made the market go up every day, they simply didn't look at POMO's during a downtrend.
pima
ReplyDeleteA bank can only use Excess Reserves, which far exceed required reserves. Banks have no need of POMO receipts to access their reserves. I agree POMO effect is real; I dispute it's source. Plus, banks are reducing their prop trading desks. Hedge funds and investment banks don't keep reserves so their funds are only usable on settlement day. People are psychological beings and conditioned to respond. That's what I1 is about.
McFearless, thank you for that research, something I should have done. Recent POMO's have been up days, but it's good to know not all have been.
ReplyDeleteI hope you're right, Steve, about it being purely psychological. That would imply that once I1 kicks and turns the psychology negative, POMO or not, we go down.
no problem Pima, I was able to find those dates quickly because it was right around the time Zero Hedge was running stories that all pomo days would be up days. I argued at the time that if the social mood desired to sell, then the POMO would certainly not be large enough to stop it. I think there are many flaws and misperceptions about POMO but the biggest seem to be
ReplyDelete1. Too many people seem to describe POMO in a way that treats the markets like hot air balloons, where "money coming in" makes the market "bigger", or in other words, it goes up as more money comes in. Of course, the markets are an exchange so it is not in fact getting blown up bigger and bigger as a result of money coming in.
2. Statistically we do not have a large enough sample size to observe the impact of POMO in any sort of objective way, there just isn't enough data to draw any conclusions.
3. This is more opinion, but I'm 100% in agreement with Steve on this one. It would seem to me what happened here recently was that people just knew the market would go down in September, it's a poor month historically, the economic data was very poor the previous few months, etc etc. When it didn't people needed to find an exogenous reason to explain stocks and POMO then morphed into this total conviction that all POMO's are up days, when clearly they are not.
In short, POMO is more about perception than it is actuality.