EVERY NOW AND THEN I decide to write a post that ultimately so challenges my abilities to explain and assimilate, or so upsets me that I go into a mode of groaning and gnashing my teeth before I can get it down on paper or the computer. And so it is with the post I said I was going to write today on the rumors I've heard about in the markets.
It turns out, no surprise, it's only the tip of the iceberg and pulling it all together for me, only a student and not an expert of the markets, is causing me to want to go running out of the building, screaming and tearing my hair out. The subject is too big and complex. It's definitely above my pay grade.
But I am going to put something down now anyway. I hope it makes sense. And I'll come back and refine it in the days ahead as best I can. I'm not going to be cute or erudite here, just straight-forward and organized as I can be. I will not be quoting my sources so don't believe a word I say. Just watch and listen if you have the time. Meanwhile, my sources are fairly good. I've decided to write this in a Q & A format to radically simplify the message I hope to get across. Proceed at your own risk. Take it for what it's worth.
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Q: What's this so called rumor that you're talking about, about why markets have gone up when they were actually supposed to go down recently? Isn't it a bit arrogant that you, or anyone, says that this can be predicted?
A: Let's take the arrogance of predicting markets first: To the casual observer it does seem like markets are mysterious and there's very little rhyme or reason as to when they rise and fall. In fact, today with computer technology and the science of technical analysis and charting, the smart money can predict the short to medium term ups and downs with shattering precision almost to the day and hour.
Interestingly, the smart money predicted Black Monday back in October of 1987--to the day--- weeks ahead of the actual event, though most average investors, including stockbrokers were unaware and unprepared, unless they were smart enough to have put sell stops on all the stocks they owned. Of course back then, once the fall came, it behooved you to stay in and ride most stocks back up. That isn't the case today since many stocks will not be coming back.
An analogy would be in the forecasting of hurricanes. Remember the old days when hurricanes hit land with only hours of advanced warning? The Long Island Hurricane of 1938 comes to mind. None of the weather forecasters predicted it, except one lonely man down in North Carolina, and none of his colleagues up the East coast would listen to him as he sounded the alarm over and over. No one, that is, until the hurricane hit Long Island like a freight train. And the rest is history. It was a grand weather event that seemed to come out-of-the-blue. Today, however, with the technology and communications we have at our disposal , this would never happen.
Q: Okay, okay. So what does this have to do with rumors about stock markets this week?
A: For about the past 10 days, the smart money has known that markets were due for a pull back, were about to fail at certain resistance levels. Smart money had battened their hatches. By Tuesday after Memorial Day this week, the stock market tropical storm was long over-due to hit landfall. But it didn't. At least not last week or this Tuesday. Today the storm may have blown in, but I'm getting ahead of myself.
The natural course of events has been calling for this pullback. So the fact that it didn't could only mean one thing: Something or some one has been gaming the system. Something that was big enough to game the system even for a little while. The rumors started spreading and finally came up with the gamer, so to speak. While, I can't prove it here, most people are pretty sure what happened these past 10 trading days that has kept markets from falling.
Q: Who or what is it that's gaming the system? As if you really know.
A. Most of the rumors center around the Federal Reserve and the Obama Administration as the culprits of gaming the system and tampering with the natural processes. Let's face it, they're involved with gaming the banking industry, the automobile industry and the big financial institutions, it's really not a big leap that they would be involved in gaming the stock market right now.
Q: What are you talking about? How is the Federal Reserve doing this and why?
A: By buying certain stocks, in this case a basket of stocks---the ETF called the SPY, the basket comprising the S&P 500--- the Fed can drive up the stock market, or keep it from falling, at least temporarily and keep public optimism from plummeting again.
You see, both the Obama administration and the Federal Reserve know how bad things really are and how much worse it could get. They are buying some time right now by trying to keep the markets afloat. Today, Wednesday, markets couldn't wait any longer to start dropping. No one knows whether the Fed will artifically and secretly try to buy more of the SPY Thursday or the next day or two to prevent a continued fall, but it's certainly a possibility.
Q: Is it legal for the Feds to be buying stocks, or ETFs, like this and how are they doing it?
A: It is legal for the Fed to buy certain things, especially the SPY. But it's not generally known by the public. What's even more interesting is that there's a secret trading room filled with dozens of Bloomberg monitors and traders in the bowels of the Fed headquarters that track each and every market on a minute-to-minute basis.
Many traders believe that Federal Reserve has been buying the SPY over the past week or two through anonymous electronic orders placed through a trader at Goldman Sachs. I have been asked not to publish his name. But again many traders sense this.
Q: Okay now anyone who has had the fortitude to read this knows the Federal Reserve may be gaming the system to keep the stock market from going back down. So what? What does this mean to the average investor? Is this good or bad news in the smart money's opinioin?
A: The most important thing the small investor (who usually is in the market by going long) can do right now is put tight sell stops on their long (stock) positions and revise and tighten those stops upward if the market goes up, as it may temporarily. That way, they can capture whatever gains they may have before the market falls again.
Conversely, by putting stops on now, as in TODAY, it will prevent an investor from unlimited losses on the downside. The days of buying, holding and hoping are forever over in this day of electronic trading and the current volatile/hostile investing environment we're in. Anyone who takes the buy and hope approach would be considered very foolish indeed.
These are not times for the hopeful or the faint-hearted---either for stocks or bonds (which I'll get to in another post).
At the least, putting sell stops, tight downside stops on the stocks you haven't yet sold is like buckling your seat belt in case you get into an accident. Only the foolish don't buckle their seat belts in this day and age on the fast highway of finance and investing.
Q: Are markets going up or down now that the Federal Reserve may be gaming the system?
A. Can't say yet and if you have your seat belt fastened it doesn't matter. But it's for sure that while the Feds are a good-sized player, it/they can only control or prop up the enormous stock markets for the short-term. Nature will take its course. So taking profits or small losses now or putting tight stops on stocks are in order. That way you prepare for the worst and then, and only then and in that order, you can hope for the best.
Q: Anything else you want to convey?
A: Actually yes there is. I want to write a little about what's happening to the U.S. bond market and what the effects of falling bond prices and sky-rocketing yields will have on us all, and especially mortgage rates. Do you know why and how they're connected? Why we should be concerned? Why the Federal Reserve, Treasury and the Obama administration is concerned? So I'll finish in another post soon and then give it a rest.
Q: You're certainly a glutton for punishment.
A: Yes, I suppose I am. But if another hurricane or at least a financial tropical storm is coming wouldn't you rather be as prepared and knowledgeable as possible? I know I would.
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I found your Q&A very informative. Never in a million years could I have done this! Had NO idea that the Fed Reserve manipulates the markets. Nothing is as it seems. Welcome to Alice in Wonderland, I guess!
ReplyDeleteWell, C, how much they manipulate is open to speculation. However, it is generally thought by insiders that the FedRes is definitely buying the SPY now to buoy up markets and investor confidence. I noticed today---Thursday---the SPY was up again on above-average volume....
ReplyDeleteMight be a good time to buy the SPY, but with good stops.