Are The Markets Being Propped Up?

Since the massive rally began in early March, the markets have soared between thirty and forty percent. Every time analysts, media, or economists question the rally and point to simple overbought stocks or specific sectors, after a small pullback, the market seems to mysteriously rally once again.

There have been many questions about the validity of the rally. Questions about whether or not the Government, Treasury, Federal Reserve or even the PPT (Plunge Protection Team aka Presidents Working Group) have been behind it. Let’s examine closer.

The rally seems to have been a two part rally. One with volume and one without. When looking at the chart of the S&P 500 from March 6th, the bottom, to April 2nd, volume was very heavy. Since then, volume has been almost nonexistent. In fact, volume has continued to get lighter over the last couple weeks. Those that live and breathe the market know that light volume can make the markets susceptible to manipulation or propping. This means that those with enough money, can cause spikes in the markets. Once the markets begin to rally, often hedge funds and other money managers will join in the buying. Shorts get squeezed and the snowball effect will grow. In other words, it does not take constant buying to create a rally. All it takes is buying in specific stocks like XOM, GS, JPM, AAPL (market leaders) or the futures at a specific time when light volume allows it.

The second half of the rally, ever since early April seems very suspect. I have talked and written quite a bit about how impressed I have been with President Obama’s administration in understanding the market and the Carrot Effect. The Carrot Effect is what I call the ability of the administration to keep the markets always looking for the next bailout, the next announcement or tidbit of news. By doing this, they keep the markets always looking towards the next positive event, keep the buyers long and the shorts fearful or on the sidelines. It has been pure genius. There is always some sort of presidential speech, Treasury announcement or Federal Reserve statement. If Tim Geithner is not speaking, President Obama is speaking. If President Obama is not speaking, then Ben Bernanke is speaking. If none of them are speaking, you better believe a bank CEO is making a positive announcement, an upgrade is coming or a massive suspicious “buy program” is hitting the markets.

These buy programs have been specifically strange to say the least. With minutes left in the market on countless light volume days, a massive buy program on the futures will hit where one-hundred thousand contracts go through or more. When talking about dollar values, we are talking in the ten to twenty billion dollar buy program range. Needless to say, there are not many hedge funds or money managers that can pull that off on a regular basis. If it is not the futures, then Goldman Sachs or Exxon Mobile spike at times that just seem too suspicious not to be a coincidence, lifting the markets. For those of you who are not traders, Goldman Sachs and Exxon are two of the major leading stocks in the market. When those two stocks run, others follow and rallies are created.

Probably the best example of the genius of the Administration and the Federal Reserve were the weeks prior to and including the release of the Stress Test. The Stress Test was a perfect example of the Carrot Effect I speak of. Leading up to the Stress Test results there was a constant “leak” of information. It was so standard, exact and methodical, that there is little doubt in anyone’s mind it was being leaked by the Federal Reserve and the Administration on purpose. Each leak kept the markets inching higher. Each leak was testing the waters for the reaction of the markets. The idea of testing the waters was done just weeks ago when Chrysler filed for bankruptcy. This was a simple test to see how the market would react to General Motors, when it files. The market is continually getting prepared for the GM bankruptcy. At this point it is expected to have little impact. Just another example of the genius that is this Administrations understanding of the markets. In any case, leading up to the release of the Stress Test, the leaks of information showed the market was very receptive to the numbers the banks would be required to raise. However, the best kicker and genius of it all was that the numbers leaked to the market were actually more than the actual numbers that were announced. Think about the genius of this. Give the market slightly worse numbers but still positive as compared to what was feared. Leak it every few days to keep the market moving higher. Continue to leak it out, mixed with positive economic data (the validity and truthfulness of which most doubt) and then when the real numbers are announced, make them better. That is as sure fire way to cause a continued non-stop rally.

After the Stress Test results, the market has continued to see positive statements from the Federal Reserve, Treasury and the Government. According to many of these sources, the economy has bottomed. Has the massive government caused re-inflation rally worked? That is what they would have you believe.

Many may be asking what is wrong with the Government, Treasury and Federal Reserve propping the markets up and causing continuous rallies? If the markets moving higher, then why is it a problem? Peoples 401k’s are doing better, people feel better about the economy. So what is wrong with this? Simply put, by doing this, the rich will get richer and the poor and middle class will get hurt. Why? Because not only have the bailouts put money back in the pockets of the big players on Wall Street, but giving a false sense of security to the market, will and has started to draw the small money middle class investor back in. Sure enough, these are the folks that buy at the tops just before the drop and sell at the bottom when the pain is too severe. The Federal Reserve, Treasury and Government have not learned their lessons over the last 10 bubbles that were created by fake intervention. Each intervention and fake bottom causes more hurt and problems. While they may be propping the markets up for now, the markets always find their true level. Near term happiness and instant gratification is short lived when the Government and Federal Reserve’s hands are messy with manipulation and intervention. Long story short, the governments manipulation, will in the short and long run continue to transfer wealth from the small investor to the large.

These comments and views are just my humble opinion and not based on hard facts. They are based off of observations since April and countless years as a pro trader, studying and understanding the inner most workings of the markets.

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Comment by Colombus

2009-05-28 08:25:51

Completele agree with this article. Colombus

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Comment by Kiwi

2009-05-28 19:59:27

The published data indicates that traders have been short in Forex throughout the rally, with AUDUSD nearly at the 50% retracement level. Forex follows the stock markets but exaggerates as it goes.

The privately owned and secretive Tier One banks that act as exchanges are also the end of the line liquidity providers. They known what trades the rest of the world are holding because they are the counterparty to them and the inevitable conflict of interest has them trying to burn their customers.

Those banks have monopoly control over Forex prices, they would have to have full control otherwise they would be unable to survive as liquidity providers to all comers.

It would be a scandal if the NYSE started trading against its own customers but in Forex it is the accepted norm, with the consequence that governments are forced to intervene in exchange rates to limit the damage done to their economies by the Forex banks exaggerated price movements.

Now if Forex prices follow the stock markets it is for one reason, profit for the Forex banks. Those banks are in the business to manipulating market prices. It would be a damn silly Forex bank that followed stock market prices but made no attempt to protect and enhance its interets but manipulating stock prices at the same time.

I have no idea why people imagine price movements happen only by supply and demand. Watch the endless movement in a low liquidity pair like NZDEUR and realize that nobody trades these pairs continuously, just a bank trading with itself as counterparty in order to keep prices moving and draw traders.

The Tier One banks dont have to front up with $100,000 per lot, they only have to stay good on their liabilities. They have every advantage in the book. Of course they use it.

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