Manipulation, Interest Rates and Dow Theory
I continue to believe, based on the evidence at hand, that the rally out the March 2009 low is a large scale bear market rally that should ultimately prove to separate Phase I from Phase II of the much larger and ongoing secular bear market. But, just as I told my subscribers before that low was even made, the longer this rally holds up, the more dangerous it becomes. Reason being, it becomes more and more convincing. I also continue to receive questions asking whether or not the Dow theory or any other market discipline is still applicable in light of the manipulation.
History shows that there have been efforts to manipulate the markets as long as there have been markets. But, history also shows that in the end such manipulative efforts are in vain. Just as the manipulation to "fix" things following the decline into the 2002 low only made matters worse and ultimately failed, so will the current efforts. We are all very familiar with the 1929 crash and the Great Depression that followed. Well, I can assure you that there were efforts to manipulate and "fix" things then, as well. But again, the market ultimately had its way and these efforts also ultimately failed and the Dow theory proven correct. No, this time is not different.
The following quotes are from the Great Dow Theorist, Robert Rhea.
"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!'
It is true that this is not the early 1900's. We also know that today the Fed has more tools available to influence the market as well. But, at the same time the markets are much, much larger than they were in the early 1900's. Today, the total market value of the NYSE is reported to be some 12 Trillion dollars. With QE2 reported to be 600 Billion, that equates to 5% of the value of the NYSE. The exact number of U.S. stocks is estimated to be more than 15,000. The broadest based measure of the U.S. equity market is Wilshire 5000, which represents 5,076 U.S. companies, with a total market value of 13 Trillion dollars. So, while 600 Billion is not exactly pocket change, it is a mere drop in the buck compared to the market as a whole. It is because the market is so much bigger then any efforts to manipulate them that I believe the manipulation will once again fail. The efforts to manipulate are, by and large, an effort to create the illusion that someone is in control, which in itself is really the greater tool. While the times and the numbers may have changed, the quotes from Robert Rhea and William Peter Hamilton above are still applicable as is Dow theory, cycle theory and my quantitative methods. At some point the liquidity factor will be overridden by the natural forces and the Phase II decline in accordance with Dow theory will begin. For now, the bear market rally that began at the March 2009 low remains intact in accordance with orthodox Dow theory.
As for interest rates, my interest rate model is currently telling me that the bias is to the upside in spite of the efforts to keep rates low. I suspect that the natural forces of the bond markets will also have their way over the manipulative efforts. In doing so, this too will have less than desirable impact on the economy. It may be that what my interest rate model is picking up on is the liquidity induced inflation as a result of QE2. Or, on the other hand, perhaps the model is picking up on the ultimate failure of the manipulative campaign. Regardless, until this model changes, the tidal forces for interest rates are now up and I do not see how that is positive for the engineered recovery.
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