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Zero Hedge

The Fed's Juicing the Market This Week… But What's Coming Won't Be Pretty

The markets are roaring higher today based on two items:


1)   Today is a Monday… which trading algorithms have been programmed to expect will be an “up day.”




2)   It’s options expiration week.


Regarding #1, there is no real reason for stocks to move higher today. The recent data shows that Bloomberg ECO U.S. Surprise Index is collapsing at a pace not seen since 2009 (when everyone thought the world was ending).


Aside from this, the PPI data showed that profit margins fell in a number of industries. And of course, there’s US retail sales falling in February: the third straight down month.


Negative economic surprises, falling profit margins, and collapsing retail do not point to a strong stock market.


Regarding #2, options expiration week is the Fed’s favorite week to provide Wall Street with additional liquidity so the latter can manipulate the market to shred  

as many options contracts as possible.


This is not conspiracy theory. Consider that technically ALL Fed QE programs ended in late October 2014. And yet, since that time, the Fed has made LARGE increases in its balance sheet (swapping liquidity for assets) on every single options expiration week with only one exception.


Weeks in which the Fed’s balacnce sheet shrunk are red. Weeks in which it expanded are black. And options expiration weeks are highlighted in gray. Note that the largest expansion moves per month occurred in options expiration weeks with the exception of February.



So this week will likely feature another large Fed balance sheet expansion as the Fed provides a money pump to Wall Street so the latter can gun the market to insure the greatest number of options contracts expire worthless.


This is the short-term scenario. The longer-term scenario is that the market is prime for a sizable collapse. The single biggest driver of stocks is earnings. During bubbles, sharp divergences can emerge as earnings begin to roll over and stocks move higher… but inevitably, stocks ALWAYS drop to close the gap.


With that in mind, take a look at the below chart. The divergence between stocks today and EPS is even LARGER than it was during the 2007 bubble!



Stocks can gyrate this way and then in the short-term. But in the longer-term, we’re set for an epic collapse. This bubble will burst as all bubbles do. And when it does, it’s going to catch 99% of investors by surprise.


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Best Regards

Phoenix Capital Research