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Sentiment of Banks Part 2

Fiala Petr
Published: 4.6.2014 | Last modification: 4.6.2014 17:11  | Comments: none
I have prepared another three charts on the theme of the FED open market operations and how they influence asset prices.

Fist chart shows long-term relationship between S&P 500 futures contract and FED operation. The upper oscillator is very smoothed, derived from the data on POMO+TOMO +security lending. Those programs are described here.  In short using these programs FED provides money to banks.  

Chart 1: The indicator in the upper graph panel illustrates a demand of the banks ( dealers of the FED) for money. It is very smoothed stochastic oscillator ( 25+50 weeks).   As you can see from the chart, a decline in demand of the banks leads to a decline in the price of S&P 500 ( coloured in red). When the banks are optimistic, they want to lend more money from the FED ( the curve in the upper pannel is rising). The rise in demand is accompanied by an increase in the price of S&P 500.  

Chart 2: Here is the same oscillator, the only change is in calculation period as that is shorter ( 25+25 weeks). You can see how the decline in demand of the dealers leads mostly to a decline of price of the EWG ETF ( German stocks). This chart shows   that banks are using the money from the FED to buy European assets, mainly stocks and bonds. Given the fact that demand for money has dropped to minimum, I would not be surprised to see some market correction in the weeks ahead. 34 USD is the main resistance for EWG, so there is still some room for the price to go up.    

Chart 3: The last chart is positive for stocks. As long as there is a growth in USDJPY, it favors   stocks over other assets, mainly metals. There is a long- term correlation between a price of broker&dealer ETF IAI and USDJPY that is right now +0,87 ( for 400 weeks,   maximum is 1). There is again the FED oscillator in the middle panel. You can see that whenever this indicator rises to the maximum, it is positive either for stocks or for metals, sometimes both.   However it will be dangerous for the stocks if USDJPY breaks down under trendline some day.  

Petr Fiala

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