Saturday, May 9, 2009 Comment

Here's an email I got from one of my friends:

"I can’t understand the stock market going up. When will people figure it out that the economy still sucks, people are still losing their jobs, more foreclosures are coming. Did people just get numb? Do you have any thoughts when this will come crashing back down?"

Here's my answer to him:

That's the $64 question.

We have a Congressional authorized program from Treasury called the Plunge Protection Team (PPT) that is very active in the markets. The Treasury primarily uses Goldman Sachs (GS) as their proxy to buy stocks with taxpayer money to prop up the markets. GS is the most active program trader with the most recent data reporting they buy and sell more stock each day than the other 5 largest program traders combined. Some of the other 15 largest program traders are also PPT proxies (e.g., JPMorgan) with these top 15 responsible for 32.6% of the total volume of the NYSE. They for all intents and purposes control the market.

The market must be thought of as a casino. Right now, the put/call ratio on the DOW, the S&P, and the NASDAQ is heavily bearish. The bearish "puts" are 1.5 to 2 times the number of bullish "calls." When the market is this heavily bearish, all the PPT has to do is raise the stock market price a little, then the bearish traders holding "puts" panic and sell. When they sell, they have to buy stock to cover their puts. This raises the stock market even higher. It is called a short squeeze. A good portion of the rally for the last two months has been shorts buying stock to cover their puts.

This also works the other way. If the market starts going down, the longs with their calls have to sell stock, which will drive the market down further. With a heavily bearish market as it is now, the bulls have the advantage because there aren't as many calls to squeeze to drive the market down lower. They don't have the leverage.

What this means is as long as the market stays heavily bearish, it will help keep the market going up due to put/call ratio leverage. The market can be overwhelmed by bad news and drive prices down even in a bearish market, but with generally low volume as many participants are out of the market, the PPT can effectively control the market. In the mean time, GS and these other major program traders have made lots of money going long with the help of the PPT.

With Islam Saudi King bowing and hand kissing B Hussein in charge, he might keep giving the order for the market to continue to rise using the PPT. He did make a public statement about 2 months ago that "now is the time to invest in the market because its going to start going up." You know as well as me he's a control freak and the idea of manipulating the stock markets is way too much for him to resist. It's his pathology. He's got hundreds of billions of dollars in TARP funds he can use for market manipulation and it doesn't take much. Heck, with the market rising, the PPT is making a profit.

The failure of this rally starting on March 6th to provide any meaningful decline at all, means we are in a rally that is almost parabolic, which usually do not end well. It would be healthier for this two month rally if a 10% or so correction would happen. It would allow for a relief of overbought conditions and a retooling to send the Industrials toward 10,000ish in months ahead, before the inevitable big drop. If the DOW rises straight up to the 9,000 area without a correction, then we have to entertain the possibility Elliot wave (B) up is over, and the cataclysmic wave (C ) down (a massive market crash to 4,000 to 5,000 for the DOW) is coming sooner than anyone wants. Most economists have predicted this will happen later this year. Maybe not the way things are unfolding.

A Bloomberg article just said executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market. Think they might know something we only suspect?

Another thing to consider is inflation, or devaluation. If the US dollar devalues a lot, this would drive stocks up as new inflated nominal dollars seek real dollar values. But the stock market is waaayyyy overvalued right now given earnings and profits - - now and projected.

How this all plays out is anybody's guess, but I do know one thing. This market will eventually go down big time at some point unless a big devaluation happens first. Even then, a big devaluation would drive prices lower for a short time before starting back up.