From Jesse's Cafe Americain:
Several readers were kind enough to write in with more material about this correlation as noted in the ContraryInvestor as I had requested.
If the Fed is buying in the TBA portion of the MBS, it is clear that this is a cross-correlation, since both this market and option expiration have similar dates.
Friend Lee Adler over at the Wall Street Examiner has also been tracking this and notes:"Jesse (whose work I greatly respect or I wouldn't feature it) is wrong on this count in my view, but correct in that the MBS purchases do have an impact on stocks, as does any liquidity pumping. But that impact is far less than the direct impact of open market operations directly with the Primary Dealers, as was the case in the direct Treasury purchases, and the GSE purchases. When the MBS liquidity is withdrawn it will have an impact, but mostly on the Treasury market. The impact on stocks will be secondary, and not pretty, I might add."He specializes in this area, and his analysis seems to be 'spot on.' But I have to add to this that Jesse is not the Contrary Investor, although I would be glad to be the author of his databases and excellent analysis on the markets, on the whole, week in and week out. And I often rely on information and perspectives from a variety of connoisseurs of financial data, who add immeasurably to the daily fare here.
Here is what JESSE said."The data is intriguing to say the least. As you may recall, option expiration in the US stock indices occurs on the third Friday of every month. We have pointed out in the past that this monthly event is often the occasion of some not so subtle racketeering by the funds and prop trading desks of the banks in separating the option players from their positions, and pushing prices around to maximize the pain.
Why would the Fed wish to provide extra liquidity, to the tune of $60 billion or so, for the banks during that week? There must surely be other ways to support the equity markets. Such as buying the SP futures in the thinly traded overnight session. I am not aware of a strong correlation for stock selloffs or extraordinary weakness in option expiry weeks per se.
It might not be a coincidence, but there could be some unrelated event in the mortgage markets that also occurs on the third Friday or Thursday of each month. We are not aware of it, but that does not mean it does not exist. They might also be making the purchases more randomly, but reporting them on some schedule as the Fed does its H.41 reports, for example. Anyone who might know of such a cross correlation would be kind to let us know of it.">>>MORE
...Last on tonight’s list is a piece from Jesse’s Cafe Americain that references a piece from ContraryInvestor. Apparently 86% of the Fed’s MBS purchases (part of the QE program) have occurred during OpEx weeks.
In following the money, this is the only thing we can prove in terms of actual Fed actions relative to the equity market itself. A mere coincidence? Not a chance. As we see it, the Fed printing of dough to buy back MBS has had a dual purpose. The ultimate new age definition of cross-marketing? Yeah, something like that.
Now that we have covered this data, the question of “what happens when the Fed stops printing money in March?” takes on much broader meaning and significance. Of course the Fed has not directly been buying equities with their clever and clearly very selective timing of MBS purchases, but they sure as heck were providing the immediate and sizable liquidity for “some one else” to do so during equity periods where they could achieve “maximum effect”....MORE