Notes From the Rabbit Hole
|
Is the Stock Market Rigged?
By Clif Droke January 11, 2010
I
received an interesting comment from my previous commentary,
“Prospects for Economic Recovery in 2010.”
The basis of my claim that 2010 will witness some economic
recovery was the “6-9 Month Rule” of Dow Theory fame.
Simply stated, this rule says that a 6-to-9 month stock
market recovery that follows a market decline and economic recession
bodes well for an economic turnaround.
The
comment I received is worth discussing since it reflects a belief
that is widely held today concerning the financial markets.
He writes, “The stock market is artificially propped up
through government purchases of Dow stocks with tax money deposited
in broker accounts at such money centers as Goldman Sachs and
JPMorgan Chase, among others. They
can levitate the markets indefinitely with Fed Reserve account
funds. The If
there is any truth to these statements the implication behind them
statements is truly staggering.
The problem that immediately confronts us as we examine these
claims is of course proving their veracity.
How can we, as outsiders with no way of knowing what really
goes on in the inner circles of high finance, be sure that there is
the degree of manipulation alleged in the above statement?
The obvious answer is that we can’t possibly know as a
matter of certainty that this is true. For
the purpose of our discussion, however, let’s assume that these
claims are substantially true.
We’ll therefore proceed from the assumption that the stock
market is basically “rigged.”
Before continuing, though, we first have to examine the
motive behind the assumption of a rigged stock market.
Specifically, do the manipulators who control the movements
of the essential stocks seek to create a perpetually “up” market
or rather a constant level of support through the creation of an
extended trading range? And
to what end? Further,
if we assume the manipulators want a stabilized or “propped up”
market, why were they unable to prevent the credit crash of 2008?
Or did they perhaps allow the crash to occur for reasons
unknown to us but beneficial to their own ends?
This question opens up a Pandora’s Box of possibilities and
could easily sere as a subject matter unto itself.
At least we can conclude that market manipulation is a
two-way street in that while the manipulators’ primary interest
may be to support stocks, it may also sometimes be to their interest
to let stocks fall. An
example of this is found in Charles Dow’s famous statement, “A
tree doesn’t grow to the sky.”
Stated another way, a stock’s price can only go up so far
before the purchasing power of would-be buyers diminishes.
When that point is reached it’s in everyone’s best
interest to let the stock price In question decline to a more
affordable level. Indeed,
a perpetually upward trending market for share prices is an
impossibility and the manipulators, assuming they exist, are surely
away of this. A
further assumption in a manipulated stock market is that the
manipulation must proceed in an orderly fashion.
It wouldn’t do for manipulators to proceed in a haphazard
fashion, thereby creating erratic movements in the stocks they’re
operating in. This
would actually prove counterproductive since the volatility and
unpredictable movement of the stock prices would serve to dissuade
outsiders (i.e. those outside the circle of the manipulators) from
participating in the market for those shares.
A basic assumption behind manipulative activity in the stock
market is that the insiders must have someone to play against in
order to benefit from their manipulation.
Otherwise they’re just playing against each other in a
no-win situation. For a
time at least, market manipulation must proceed in an orderly way
and should provide enticements for the outsider to play against the
insiders. If
we assume an orderly market even in the midst of a manipulation
campaign, we can also assume that, for some length of time leading
up to the game’s culmination, an outsider who understands how the
manipulators play their game can profit from it.
The only catch is that the outside player must know the rules
of the game and should be able to sense when the end is near so he
can exit the rigged market at the appropriate time before the game
is up. In other words,
he must have a technical or timing discipline as well as the
presence of mind and emotional control to play against the
manipulators without incurring net losses.
This endeavor is possible and can be quite profitable if
it’s pursued in an emotionally detached, almost mechanistic
fashion. This is the
very basis behind technical market analysis, which assumes that
markets have recognizable patterns, whether they’re based on
manipulation or else the result of market “chaos.”
Returning
to our original proposition concerning market manipulation, what is
the insiders’ prime motive for rigging a market for shares?
Is it to ensure a constant flow of capital to float some
aspect of their economic sphere?
This would certainly be one goal behind any manipulation
campaign. If we assume
that market manipulation is widespread to the level suggested by the
above commentator then we might even conclude that a constant and
well ordered manipulation campaign is essential to the functioning
of the modern financial and economic system.
One
of the most famous claims made by outsiders in recent years concerns
the existence of a “Plunge Protection Team.”
The putative reason for the existent of the so-called
“PPT” is to prevent a broad market collapse.
Proving the existence of this secretive coterie is a nearly
impossible task. But
let’s assume the PPT does exist.
Our first question is why, when they were needed most, did
they allow the market to plunge in 2008?
Further, if we assume that the 2008 crash was beyond their
control we can probably also assume that they finally had success in
getting the market stabilized against starting around November 2008
and increasing their success until the market’s final low in March
2009. If we assume
this, do we not owe them a debt of gratitude for preventing an even
greater collapse, one which might easily have resulted in
irreparable damage to the economy and the destruction of the
livelihoods of countless millions?
Indeed,
one could easily question the motive of those who vilify the PPT
(assuming it exists). The
existence of the PPT assumes that without their assistance the stock
market would inevitably collapse.
If this is true, shouldn’t we be rooting for their success
in propping the market instead of throwing stones at them (even if
they’re motive is essentially one of greed)?
One can question the motives of the PPT, but what of the
motives of those who would see the PPT dissolved as it were?
Does the anti-PPT faction actually desire a market collapse
and the Great Depression that would inevitably follow?
And for what reasons? A
love of anarchy and revolution?
Disenchantment with the present order?
The questions are endless?
Another
observation that can be made is that a market for stocks that
doesn’t have an active insider or manipulative element to create
an orderly market (i.e. market makers) is essentially a
directionless one. To
see a first hand example of this we need only look at the price
graphs and trading patterns of any number of “penny stocks” that
haven’t yet gained an institutional following.
These stocks tend to trade irregularly in an extremely narrow
range for months or even years at a time, providing no return for
their owners. Sustained
stock price movement requires leadership, and this leadership
inevitably proceeds from the inside.
To this end, a market uptrend is virtually impossible without
some degree of manipulation. This
manipulation can be dangerous to those participants on the outside
looking in, especially if they lack a technical discipline.
Yet no one denies the progress and benefit that a sustained
uptrend can bring, not just for the manipulators but for all who are
connected with the company in question: shareholders, employees and
owners. When we’re
talking about manipulation of shares in the largest corporations,
the benefits can be even bigger, even to the point of producing
employment and prosperity for the nation at large. It’s
this aspect of manipulation that most concerns us.
The respondent who was quoted at the start of this commentary
seems to suggest that a.) the stock market is constantly under the
influence of manipulation, which implies that b.) the recovery in
share prices that started last March is artificial and therefore c.)
the implication for a general economic recovery based on the Dow
Theory “6-9 Month Rule” is invalid.
It can be seen, though, that even if the stock market
recovery is the result of manipulation by insiders, their
manipulative efforts have in fact prevented an even greater
calamity. The recovery
in share prices has been a boom for businesses, which in turn bodes
well for the economy. Already
certain key economic industries have seen some meaningful recovery
and this is good for the nation at large.
No matter how you look at it, the “6-9 Month Rule” is
valid regardless of whether or not the stock market recovery is the
product of manipulation. If
the recovery that has been underway since March 2009 is the result
of manipulation we can at least be thankful that the concerted
efforts of the manipulators has kept us out of another Great
Depression. Even if
their motives in rigging the market are essentially selfish, we as
outsiders still end up benefiting from it directly or indirectly for
as long as their success lasts.
It’s perhaps an uncomfortable recognition that as a nation
our fortune is largely tied with those unseen elements (however
unsavory) beyond our comprehension.
At the same time, it doesn’t automatically follow that we
can’t profit or benefit – directly or indirectly – in spite of
their activities. In
other words, manipulation doesn’t preclude success if you have the
right discipline. Cycles Over
the years I’ve been asked by many readers what I consider to be
the best books on stock market cycles that I can recommend.
While there are many excellent works out there on the subject
of technical and fundamental analysis, chart reading, etc., precious
few have addressed the subject of market cycles.
Of the relatively few books on cycles that are available,
most don’t even merit mentioning.
I’ve read only one book in the genre that I can recommend
– The K Wave by David
Knox Barker – but even that one doesn’t deal directly with stock
market cycles but instead with the economic long wave.
I’m pleased to announce, however, that after nearly 10
years of research and one year of writing, I’ve completed a book
on the subject that I believe will meet the critical demands of most
cycle students. It’s
entitled, The Stock Market
Cycles, and is available for sale at:
http://clifdroke.com/books/Stock_Market.html FYI,
a cycle student who has read The
Stock Market Cycles, Merlinda of Singapore, has created a most
insightful color chart of the long-term cycles based on the 120-year
Kress Cycle configuration. You
can see it here at: http://www.clifdroke.com/articles/images/kress.pdf
Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment. He is also the author of numerous books, including “How to Read Chart Patterns for Greater Profit.” © 2004-2010 Biiwii.com
Views presented in guest articles are those of the authors and do not represent those of Biiwii.com. Biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest. For more detailed information and full terms of service, see "About & Terms" here. |