Is 20% Pop In Stocks Most We Can Expect From Current Fed Easing?

The US stock market is now up about 16% since early June when the Fed Wire, also known as Wall Street Journal Reporter John Hilsenrath, pre announced the fourth Fed easing. In order to answer the question how much more in higher stock prices can we expect from the current Fed easing, let us look at what happened after prior Fed easing. The first Fed easing was announced March 2009, and stocks soared 50% through April 2010 before correcting 20%. To be clear, by stocks I mean the S&P 500. Then in August 2010, when the second Fed easing was preannounced stocks jumped 40% up until April 2011 before another 20% correction. Then in September 2011 after the third easing was announced stocked popped 30% peaking in April of this year, but dropped only 11% before fourth easing was preannounced in June.

To recap Easing 1 stocks rose 50% before a 20% drop. Easing 2 stocks rose 40% before a 20% drop. Easing 3 stocks rose 30% before an 11% drop. So how much higher than 16% will stocks before Easing 4 peaks? 20% would seem a logical top, since the prior three were 50%, 40% and 30%. A 20% pop would be about 1500 on the S&P 500. But will we even get to 1500?

The Biderman Market Theory has two key elements. The first is that the house has an advantage in all markets over the players. Whether the stock market, any commodity market or even the corner market the house has an advantage over the rest of us. The second is all there is in the stock market is shares of stock and money.

And the house in the US stock market has now turned very bearish. So far this September a towering $33.2 billion in new offerings have been sold, the most ever the first two weeks of any September. What is more, new offerings are three times buybacks and cash takeovers announced added together so far this month. Last but not least insiders have been selling about 11 times more shares than they are buying. The last time the sell buy ratio was this high was in April, right at the prior market peak.

Why it particularly matters that the house is now bearish is that the house had been providing all of the new cash to the stock market for the past year and a half via float shrink. In essence, at its simplest, float shrink means more money chases fewer shares. The logical outcome of more money chasing fewer shares is rising stock prices. How that happens is companies give shareholders cash in exchange for shares. Since institutions control 80% of the float and institutions usually hold a constant cash percentage, float shrink creates automatic buying of the rest of the market by the amount of the float shrink.

What is going on now is float growth. Float growth means institutions have to sell existing holdings to raise the cash to buy newly created shares. That translates into less money chasing more shares. And stock prices should go down. That is what happened this past April. Will stock prices roll over and sell off soon?

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Who knows. What I do know is that Mr. Obama odds of winning will be much higher if the market holds up. Conversely, a sharp market sell off through election day would certainly help Mr. Romney.

Below you may find the video.

Written By: Charles Biderman