There is little doubt in the minds of those who think critically that Federal Reserve monetary policy has been and is used to elevate asset prices, especially stocks. While true, Federal Reserve policy is only part of the picture. What we actually have is what amounts to a stock market engineering war room, even though there is not an actual room where all of the manipulation thought of is put in place.
How do I know this? Well, I don’t based on any facts at my disposal. I have no such facts. Why would I? If I could demonstrate factually that the stock market is being purposefully engineered higher due to an organized effort, everyone would know what I know and it would stop. The fact is that in the present moment, no one has any facts as to what all others in the world are thinking and doing. Insight based on human behavior in terms of knowing what powerful people are prone to do based on self interest, in fact turns out to be the best tool for determining what is going on in the world under a the public’s radar. I don’t use facts for this type of analysis because there aren’t any specific facts. The facts that I do use are present eternally and are not part of economic standard dogma. It is a fact that self interest is the only relevant incentive when it comes to behavior in large aggregations of people. It doesn’t work that way in families and other close nit groups.
I start with the word suppose. Lets suppose for sake of example, how the stock market would be rigged if it was. Then entertain a few questions? Would wealthy powerful people rig the stock market if they could? They certainly have the means. Then, assuming they could, would they? Why would they not? Would it be in their best interest to do so? Only self interest drives aggregate behavior. It only makes sense that they would.
In the years leading up to the crash of 1929, there were countless successful efforts to rig stocks. J.P. Morgan himself managed to single handedly temporarily turn the stock market up during the 1929 crash. There are many precedents.
Modern stock market manipulation began when the Reagan administration, began tampering with the financial markets.
As High Frequency Trading Firms (HFTs) have evolved, they have become a critical tool for top down management of stock prices. From the beginning, these firms , have derived their earnings boy exploiting and sabotaging the trades of honest investors, large and small. In order to do this, they must operate in a politically compatible atmosphere. If they cause and maintain uptrend that is fine. Who will complain?
HFTs manage stock prices on a tic by tic basis. Prior to their advent, intraday charts looked much differently. The chart below from 2010 is an entraday chart of the Dow. Notice that it looks like a typical candle stick chart. It look about like a daily chart even though the time period is different.
This is what an intraday chart of the Dow looks on a day in 2020.
The difference is that the second chart is the result of a mechanical trading system. Traders are familiar with various chart patterns, like head and shoulders, flag, pennant, rising wedge, declining wedge and so on. The psychology behind these patterns is explained in the classic, Technical Analysis of Stock Trends, Edwards and Magee. Technical analysis evolved as an explanation of stock prices as they occur in a free market setting. Replace the free market aspect with a mechanical system and a different kind of pattern is the result. A good name for this pattern would be something like the Deep State Snake.
On this particular day, the market gaped up. Rarely does the market not gap up or down significantly. This sets the tone for the day. Regardless of whether or not the gap is up or down, rarely is the shape of the chart much different. A gap down is to draw in shorts to begin squeezing starting shortly after the first hour’s trading is finished. There is generally a dip at about this time, almost without exception. Goal one is to close at the high for thee day, even though it appears all through the day that bulls are struggling and the market seems about to fall off a cliff. If the averages cannot close at the high, the second choice is to close above the open and for sure not down for the day. At critical junctures like at significant moving averages we see what I call an up no matter what day. Short squeezing, news announcements, speaches, buying outright and everything else is employed to make sure that nothing technical accu5rres that might draw in more volume on the sell side.
Big tech collects information on everyone. Why would the ALGOs not track every open position, account history of every retail customer and anything else they have access to. Do the retail firms mind? Why would they? They get paid every time the ALGOs run one of their customer’s stops. It is open season on individual investors.
The ALGOs claim to be necessary for market liquidity. What they do is make certain the the preponderance of liquidity is on the buy side of the market. They have the best market technicians on staff and their function is to fleece honest traders.
The only times the ALGOs cannot park the averages higher on a giving day is when there is a shock to the financial markets, or when longer term holdings come on to the market. The market can be manipulated if volume is light so a culture of intraday trading is cultivated to prevent that from happening. There is an old Wall Street adage some might remember. “The market need volume to rise. Without volume the market will fall on its own weight.” The relationship between price and volume has reversed. That is because a mechanical system now decides stock price outcomes. It has been this way for many years now. People are used to it but free markets don’t work that way.
The ALGOs can change the order sequence flow so that buy orders and sell orders hit the floor in whatever pattern suits them. Perhaps the most necessary aspect of any free market is that all buyers and sellers, as much as possible have the same information. We know have a centrally planned stock market. Any economic stimulus requires removing one or more free market attributed in order to make the system function on paper.
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