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Fed Policy Resusbstantiation Rally May Be Preempted

This is an excerpt from the MacroLiquidity Pro Trader weekly report. Subscribers, click here to download complete report featuring macro liquidity indicator review, analysis, and forecast.

Fed and US Treasury injections of extra cash into the market via Fed MBS purchase settlements and temporary Treasury debt paydowns often tend to coincide with FOMC meetings.  We have seen this phenomenon so much that it would appear to be deliberate. Most of the time it results in a 2-3 day rally immediately on the heels of the FOMC announcement.

We even have a name for this phenomenon–the Fed Resubstantiation Rally, in which the market appears to be cheering the Fed’s action. In reality, the extra cash coming into dealer accounts “predisposes” the market to do that. During QE it was just an enhanced aspect of the regular flow of Fed cash injections into the market. Today, without QE, it’s one and done until next month at mid month. The market must fend for itself after the MBS settlement week ends on September 21. The Treasury paydowns will be a one day affair on September 17, so they should be out of the way as well.

This FOMC announcement is on Thursday instead of  the customary Wednesday. The first and largest slug of Fed MBS purchases settled on Monday. A little more is coming on Thursday, coincident with the Treasury paydowns. The party could turn into a real barn burner Thursday afternoon as Madame Chair performs her scripted dog and pony show with the mass media hound dogs dropping softball questions in her lap. That might just mark the end of a buy the news rally, although a bit more cash is coming next Monday to possibly add a little froth before they turn out the lights.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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