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Periodically, the
question of manipulation comes up and I've recently been asked if the Dow
theory or any other technical method is still of value because of all the
efforts to manipulate the markets. The short answer is, yes. While
manipulation can have a temporary effect on the market, it cannot fix the
problem, it cannot stop the inevitable and in the end it will only serve to
make matters much worse.
I think we can
all agree that every known influence, be it positive or negative, false or
real, fundamentally sound or not, big or small, founded or unfounded,
manipulative or not, all impacts price. Well, the very basis of technical
analysis is that everything is discounted into price. So, if every influence
known to man and the market is reflected in price and technical analysis is a
study of price, then absolutely the Dow theory and other technical methods
are just as valid today as they have ever been and the manipulative efforts
to "fix" things does not matter. The only variable that I see in
technical analysis, like anything else, is that one person will see the data
to mean one thing, while another person may see it to mean something
different. Therefore, opinions may vary, but still everything is discounted
into price and it all boils down to the technician and his methods.
I know that some
believe that the March 2009 low marked the bear market low, that we are now
in a recovery and that the worse thing they see is maybe a "double
dip" recession. I have stated all along that my research suggests to me
that the rally out of the March 2009 low has been a bear market rally and
that it should ultimately prove to separate Phase I form Phase II of a much
longer-term secular bear market. Point being, we are all looking at the same
price data, but different conclusions are being drawn.
As price moved
into the July low, it seems that most who were even remotely familiar with
Dow theory were proclaiming a so-called Dow theory "sell signal."
As the July 2nd low was made, I told my subscribers that this was not a so-called
Dow theory "sell signal." Rather, I explained that it was an
intermediate-term low and that higher prices were expected. Point being, this
was again another example of everyone looking at the same price action, but
with varying opinions.
So, what may be
occurring is that some people will look at specific technical opinions and
then when they don't come to pass, they conclude that technical analysis no
longer works and it's always easy to blame it on manipulation and the PPT.
Again, everything is discounted into price and if a given forecast, based on
a particular technical discipline does not pan out, then its because the
analyst that made the forecast was in error in that he did not read the
meaning of the price action correctly. We have all certainly been there
before. It's not that price was wrong and it's not because of the PPT or
manipulation, because regardless of what is driving price, everything is
still reflected into price and price is what it is. It's only the
interpretation of price action that varies. With that all being said, any
technical picture can also evolve, morph, take more time, or even less time
than originally anticipated. As a technical analyst, one must be able to
recognize when this is occurring and adjust with the new data. If not, then
he will likely find himself out of step with the market.
Personally, it is
my belief that manipulation only makes matters worse. As an example of this,
all throughout the period between 2003 and 2007 I explained that we were
seeing a stretched 4-year cycle. I recognized this based on my statistics,
cycles work, and "DNA Markers" and I was able to adjust as the
technical picture morphed and stretched. But, I knew that the 4-year cycle
had not bottomed and I explained that the efforts by the powers that be to
hold things together would ultimately only serve to make matters worse. There
is no doubt that the manipulative efforts seen during this period contributed
in a very negative way to the credit and banking crisis. In my eyes, this was
largely accomplished through the unscrupulous lending practices and the
financially irresponsible, resulting in the housing bubble, which Greenspan
tried to tell us did not exist. But, in the end, the manipulation did not
prevent the inevitable decline into the 4-year cycle low. All the
manipulation did was blow the balloon up tighter and tighter as the 4-year
cycle stretched and then, when it popped it simply produced a bigger bang, in
that the manipulation did in fact make matters worse.
There have been
continued efforts to "manage" the market throughout the bear market
rally that began at the March 2009 low. Once the bear has sucks enough of the
misguided victims back into his grip, the bear market rally will conclude and
the assent into the Phase II low will begin. When this occurs, we will again
see more manipulative efforts to stop the inevitable. But, once the bear
market resumes, and if the "DNA Markers," that I have identified at
all other tops since 1896, are confirmed, then it will not matter. Once the
proper setup is in place, all the manipulation in the world will not stop the
natural forces in regard to the Phase II decline. I hope people are
listening. If not, you have been warned!
The following
text on Manipulation was taken from Robert Rhea's book, The Dow Theory.
"Manipulation
is possible in the day to day movement of the averages, and secondary
reactions are subject to such an influence to a more limited degree, but, the
primary trend can never be manipulated.
Hamilton
frequently discussed the subject of stock market manipulation. There are many
who will disagree with his belief that manipulation is a negligible factor in
primary movements, but it should always be remembered that he had, as a
background for his opinions, a most intimate acquaintance with the veterans
of Wall Street, and the advantage of having spent his life in accumulating
facts pertaining to financial matters.
The
following comment, taken at random from his many editorials, affords
convincing proof that his views on the subject of manipulation did not vary:
'A
limited number of stocks may be manipulated at one time, and may give an
entirely false view of the situation. It is impossible, however, to
manipulate the whole list so that the average price of 20 active stocks will
show changes sufficiently important to draw market deductions from them.'
(Nov. 29, 1908)
'Anybody
will admit that while manipulation is possible in the day-to-day market
movement, and the short swing is subject to such an influence in a more
limited degree, the great market movement must be beyond the manipulation of
the combined financial interests of the world.' (Feb.26, 1909)
'...the
market itself is bigger than all the 'pools' and 'insiders' put together.'
(May 8, 1922)
'One of
the greatest of misconceptions, that which has militated most against the
usefulness of the stock market barometer, is the belief that manipulation can
falsify stock market movements otherwise authoritative and instructive. The
writer claims no more authority than may come from twenty-two years of stark
intimacy with Wall Street, preceded by practical acquaintance with the London
Stock Exchange, the Paris Bourse and even that wildly speculative market in
gold shares, 'Between the Chains,' in Johannesburg in 1895. But in all that
experience, for what it may be worth, it is impossible to recall a single
instance of a major market movement which depended for its impetus, or even
for its genesis, upon manipulation. These discussions have been made in vain
if they have failed to show that all the primary bull markets and every
primary bear market have been vindicated, in the course of their development
and before their close, by the facts of general business, however much
over-speculations or over-liquidation may have tended to excess, as they
always do, in the last stage of the primary swing.' (The Stock Market
Barometer) '...no power, not the U. S. Treasury and the Federal Reserve
System combined, could usefully manipulate forty active stocks or deflect their
record to any but a negligible extent.' (April 27, 1923)
'The
average amateur trader believes the stock market is guided in its trends by a
certain mysterious 'power,' this belief being the one factor, next to
impatience, most responsible for his losses. He reads tipster sheets avidly;
he scans the newspapers industriously for news likely, in his opinion, to
change the trend of the market. He does not seem to realize that by the time
the news of real importance is printed, its effect, so far as the basic trend
of the market is concerned, has long ago been discounted.'
'It is
true that a flurry in the price of wheat or cotton may influence the day to
day movement of stock prices. Moreover, sometimes newspaper headlines contain
news which is construed as bullish or bearish by market dabblers, who
collectively rush in to buy or sell, thus influencing or 'manipulating' the
market for a short period. The professional speculator is always ready to
help the movement along by 'placing his line' while the little fellow timidly
'lays out' a few shares; then, when the little fellow decides to increase his
commitments, the professional begins to unload and the reaction ends, and the
primary movement is again resumed. It is doubtful if many of these reactions
would ever be caused by newspaper headlines alone unless the market was
either overbought or oversold at the time---the 'technical situation' so dear
to the hearts of financial news reporters.'
'Those
who believe the primary trend can be manipulated could, no doubt, study the
subject for a few days and be convinced that such a thing is impossible. For
instance, on September 1, 1929, the total market value of all stocks listed
on the New York Stock Exchange was reported to have amounted to more than
$89,000,000,000. Imagine the money which would have been involved in
depressing such a mass of values even 10 per cent!'
I have begun
doing free market commentary that is available at www.cyclesman.info/Articles.htm
The specifics on Dow theory, my statistics, model expectations, and timing
are available through a subscription to Cycles News & Views and the
short-term updates. I have gone back to the inception of the Dow Jones
Industrial Average in 1896 and identified the common traits associated with all
major market tops. Thus, I know with a high degree of probability what this
bear market rally top will look like and how to identify it. These details
are covered in the monthly research letters as it unfolds. I also provide
important turn point analysis using the unique Cycle Turn Indicator on the
stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and
more. A subscription includes access to the monthly issues of Cycles News
& Views covering the Dow theory, and very detailed statistical based
analysis plus updates 3 times a week.
Tim Wood
Editor, Cyclesman.com
Copyright
© 2004-2008 by Tim W. Wood. All rights reserved.
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