Daily Fed QE April 22 – Not Enough

Yesterday the Fed bought $15 billion in Treasury paper from the Primar Dealers, paying for them by depositing newly imagined money into the dealers bank/trading accounts at the Fed. That’s just what the Fed said it would do each day this week. It’s down from $30 billion a day last week and $75 billion a day a couple weeks ago.

The Fed will buy another $15 billion today. Sounds like plenty right? Well, get this. The US Treasury is selling $65 billion in new T-bills today and $91 billion tomorrow? How is the market going to absorb that pile of shit with only $15 billion a day from the Fed?

There used to be enough to absorb the pounding of daily gargantuan Treasury paper issuance, but $15 billion a day is way short of enough. We saw the results in the stock market yesterday. Something has to be liquidated to raise the money to pay for all that nice shiny new Treasury debt toilet paper that everybody wants but nobody can pay for.

So what to they do? Borrow to buy it, or sell something else. Either way, not good.

Of course, the Fed is also buying MBS. This week they’ve scheduled MBS purchases of $9-10 billion per day. Yesterday they did only $7.75 billion. Why did they cut? Who knows? More than enough was offered.

Regardless, $9 billion is a drop in the bucket compared to what the market must absorb from the Treasury day in and day out while it raises funds to fight the Econovirus2020.

Also, the MBS don’t settle same or next day like the Treasuries do, however. The paper sold this week won’t settle until next month. There are no MBS settlements scheduled from now until May 13. The dealers will have to wait for that cash.

But yesterday they had the benefit of $48 billion in settlements of previous forward purchase contracts. And still, the stock market tanked. Treasuries did ok though, despite the market needing to absorb $98 billion in newly issued T-bills yesterday. Repo, anyone?

This is critical stuff. For a couple weeks, the Fed had created an illusion of working markets by pumping in enough cash to absorb all the Treasury paper with cash left over to buy other stuff. No longer.

I cover these issues in depth twice a week or so at Liquidity Trader, with a nice chart to show you what’s happening, and what’s coming next, at a glance. Here’s the last episode of that soap opera. Subscribe today with a 90 day risk free trial. 

Stock Market Trading Setup for Wednesday, April 22, 2020

Lately, every time the market has sold off, it has bounced back. The overnight session was a case in point. This is classic bull market action until proven otherwise. But here, we’re only concerned with today.

The futures have been trading in between 2718 and 2776 overnight and in the pre market. That’s up 39 at 2769at 7:15 AM in New York.

This appears to set up a new uptrend channel at a slightly lower angle than the previous meltup channel from the March low. The bottom of that channel is at 2718 today. That’s also a level support level.

That level has had 4 successful daily tests. An old friend of ours who was one of the smartest traders I ever knew would say, the more often support is tested, the weaker it becomes.

I think they may be pressing their luck here.

Rate of Change tuned to an 8 week cycle has edged to the sell side. MACD tuned to the same cycle looks toppy.

Sell signals come typically on the first hard down day of a new down phase. It didn’t happen yesterday. What up wit dat? OK, so today should be it. Otherwise the market is in trending mode. Not good for bears. 

If this is still a bear market, we’re getting to the point that that needs to be proven by a real downturn. 

Again, this is for the perspective of one day only. The purpose of these reports is not to divine the longer term. If you want longer horizons, join me at Liquidity Trader.

Hourly ES S&P 500 Futures Chart

The 5 day cycle bottomed overnight. The rally has powered back to the top of an hourly trend channel. As of 8 AM in New York, the top of that channel will be around 2768. That line is dropping at roughly 2 points per hour.

A breakout would first target 2788, then 2800 if they clear 2788. If 2768 holds and they start down from here, look for the first support around 2752. If that fails, then we’d be looking at 2718.

Hourly indicators tuned to a 5 day cycle frequency are solidly bullish here at 7:30 AM ET. But the key is the trendline at 2768. The cycle and momentum indicators say that that should be cleared. If it isn’t and the market rolls over in the early going, that would be very bearish. So 2768 is the action fulcrum to watch.

S&P Cash Index Hourly Chart 

The red bar at the far right shows where the futures traded overnight. It’s between 2718 and 2776. The futures suggest a cash open around 2775.

Resistance is suggested at that level on the cash. If cleared, they have wide open spaces to around 2825-30.

Support is suggested at 2718. That’s not likely to be threatened. But on the off chance that it’s broken later today, the market should be thin down to around 2665.