We're Rolling Over Even With the Fed Openly Juicing the Markets?

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From Seeking Alpha

The bulls have gunned for 1,100 on the S&P 500 twice now in the last two days. Both times they got strongly rejected. In fact, yesterday’s ramp job failed to even take out the Tuesday high of 1,099. This is hardly a bullish development especially given what’s going on “behind the scenes.”

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As I’ve mentioned countless times, options expiration week is when the Federal Reserve makes its largest money pumps into the Wall Street banks. In fact, the Fed continued this practice even AFTER QE 1 officially ended in March 2010.

Now that the Fed has announced an additional $340 billion in monetization, this practice will likely be even more exaggerated. And while I don’t know how much money the Fed pumped into the system this week (the Fed’s balance sheet data will be published tonight after the market’s close) I expect it will be plenty given the ridiculous ramp jobs of yesterday and Tuesday.

Indeed, it is no coincidence that stocks exploded higher within minutes of QE Lite commencing on Tuesday. Judging from yesterday’s action, we must have had some juicing around the same time of day then too.

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Let me explain how this little scheme works.

During your typical Treasury auction, investors can buy Treasuries directly from the Treasury Department themselves OR they can buy indirectly by using a Primary Dealer: one of 18 banks who do business directly with the US Federal Reserve Bank of New York and so HAVE to buy Treasuries at auctions to ensure liquidity.

This group of 18 banks is responsible for insuring the US never has a failed Treasury auction. As long as they have money, they HAVE to pony up the cash needed to make sure every US Treasury Auction is filled. The list is a veritable “who’s who” of the BIG BOYs of Finance. The following are all Primary Dealers.

   1. Bank of America
   2. Citigroup Global Markets Inc.
   3. Goldman, Sachs & Co.
   4. J. P. Morgan Securities Inc.
   5. Morgan Stanley & Co. Incorporated

Now, as you know, the Federal Reserve bought over $1 trillion worth of securities from the Wall Street banks in the last 18 months. About $340 billion worth of these securities are maturing in the near future. The Fed is using the proceeds from these securities to buy Treasuries FROM the primary dealers.

This is the “QE Lite” program I am referring to.

In some regards it’s rather clever as technically the Fed is not printing additional money OR expanding its balance sheet: both moves that would have incited great political backlash AND a massive drop in the US Dollar.

However, the fact remains that the Fed is going to be putting $340 billion in additional funds into the Wall Street banks’ hands over the coming months. And the banks are going to do what they do best: funnel this money into the US futures where they can “rig the deck” temporarily by kicking off ramp jobs that crushes the shorts and fleece options traders.

And yet, despite this happening both yesterday and Tuesday, stocks have failed to breach resistance at 1,100 on the S&P 500. Far more importantly, those rallies that did start on Tuesday and Wednesday BOTH rolled over into the close.

This is a major red flag to traders that the upward momentum of the rally from early July has been totally broken. This in turn means that once options expiration week ends on Friday, we are likely going DOWN in a big way.

After all, if you can’t manufacture a sustainable rally when the Fed’s openly juicing the market, then you’ve run out of buyers. And without buyers there’s only one way the market’s headed… DOWN.

Author: Graham Summers

daveyhorl99

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