Is the Stock Market Rigged?
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.
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