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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 U.S. stock market is a fraud. Surely you must
understand that."
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
Editor, The Daily Durban Deep/XAU Report
Clifdroke.com
Clif Droke is editor of the weekly Gold Strategies Review
newsletter, published since 1998,which covers mainly U.S. and Canadian-listed
gold mining equities as well as the spot gold market and forecasts of market
momentum trends, short- and intermediate-term. The forecasts are made using a
unique proprietary analytical methods involving internal momentum and moving
average analysis. He is also the
author of numerous top-selling trading books, including "Stock Trading
with Moving Averages." For
more information visit www.clifdroke.com
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