Sunday, January 20, 2008

The Myth of Fed Injections

Every week many people post about large Fed injections and their effect on the stock market. This activity is particularly strong on Thursdays when most TOMOs are due. Big media outlets and lots of bloggers will claim that the Fed has injected or withdrawn billions of dollars and that this will somehow have an effect on the stock market.

This Google spreadsheet computed all fed injections since Jan 2006, and computed its correlation to the DJIA and SP500 indexes (through DIA and SPY), using nearly 600 data points. The complete spreadsheet is here.

A correlation analysis was done on this "injections" and the stock market movements for each quarter since Q1 2006. Results:

- The correlation between Fed injections and DIA is -0.06.
- The correlation between Fed injections and SPY is -0.17.

The correlation between the SPY and the DIA is 0.95. A number close to zero means there is no correlation, a number close to 1 indicates a high correlation.


Fed "Injections"
(in $B)

Q1 06-202.75%2.47%

Q2 064.50.43%-1.89%

Q3 06-9.754.05%4.52%

Q4 0619.256.68%6.42%

Q1 07-7.55.51%6.48%

Q2 07-88.53%5.82%

Q3 0719.52.85%0.52%

Q4 071.75-3.96%-5.24%


SPY vs DIA0.95

Next time you hear or read about the Fed injections and the market, perhaps it's best to ignore!

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