The Plunge Protection Team has been hard at work lately,
although not in the way some traders might imagine. The very name evokes the
shadowy activities of a group of Svengalis believed to control the stock
market through timely interventions in such key trading vehicles as the
S&P 500 futures. In fact, the PPT, more blandly known as the President’s
Working Group on Financial Markets, was commissioned under President Reagan
after the 1987 Crash to prevent meltdowns. These day, however, nearly six
years into a ferocious bull market that seldom pauses for breath, one might
question why a Plunge Protection Team is needed at all. The answer is that
the PPT, far from defending against selling panics, has been furtively on the
offensive, triggering short-squeeze panics that spike shares to new record
highs at every opportunity. Usually, the news catalyzing these rallies hits
the tickertape on a Friday, when the effects of a short-covering binge are
apt to be most effective. It is hardly a stretch to imagine that these
engineered events have been scheduled and coordinated by the PPT, working in
concert with the central banks.
Last Friday, for instance, U.S. stocks opened with a
ballistic lurch higher on news that China, increasingly fearful of deflation,
is about to ease. This had already sent stocks in Europe and Asia screaming
higher overnight, setting up Wall Street’s by-now reflexive reaction. Recall
that just five weeks earlier – on a Friday, as it happened – Japan announced
its own, epic stimulus package – Max Keiser wryly called it QE9 – to the same
effect: stock markets around the world soared. A presumably intended
side-effect was that U.S. T-Bond prices spiked higher, briefly pushing yields
down to lows that will linger in investors’ collective subconscious with a
sedative effect against whatever fears they may have harbored about any
future tightening.
Losing Steam?
Permabulls who believe this game can continue
indefinitely are in for a rude awakening, especially if they have ceased paying
attention to certain technical signs that might warn of a downturn. One of
them, declining volume since 2011, has been too obvious and important even
for fools to miss. However, it is all too easily dismissed with stocks
in a parabola since mid-October. Less obvious, and possibly significant, is
that Friday’s rally failed to get second wind. The new from China juiced the
Dow 175 points on the opening, but the surge petered out in just ten minutes
before giving way to a ratcheting, four-hour downtrend. And did anyone notice
that crude oil prices barely budged? What this suggests is that the
central banks have held interest rates near zero for so long that easing
itself is no longer seen as capable of stimulating economic growth, only of
goading share prices higher.
For our part, we’ll continue to get short at every
promising ‘Hidden Pivot’ rally target, since the stock market could go into a
5000-point dive at any time. Granted, there’s no way technical analysis can
‘prove’ the Dow isn’t bound for 20,000 or higher. But with earnings
flattening at some very large U.S. companies, Europe’s economy on the brink
of deep relapse, U.S. home prices stagnating, commodity prices falling and
China looking winded, it’s hardly crazy to say that permabulls are playing with
fire. We’d rather trade both sides of the market anyway, getting long near
the lows of targeted swings, then reversing the positions at projected highs.
On Friday we used this tactic to buy DIA puts in conjunction with a
178.47 rally target. The actual high, recorded on an opening-bar leap, was
178.60, allowing subscribers to buy put options that went solidly
in-the-black by day’s end. Typically, we try to sell half of any option
position that has doubled in price so that the remaining puts can be held
without risk.
If you are skeptical that this strategy works, come
into the chat room and ask subscribers yourself. Click here for a two-week trial subscription that includes all
features and services of Rick’s Picks, including impromptu technical
analysis/trading sessions conducted on ‘live’ charts during market hours.
