We haven't yet commented on the S&P closing above 3,000 and the Dow Joneses closing over 27,000 because I didn't know what to say. Despite calling for three grand (and more) on the S&P for over two years, getting ridiculously bullish on stocks in the weeks leading up to the Christmas Eve bottom (triple leveraged ETFs, options on S&P futures), and preaching the yield curve is not yet important, despite all that, something doesn't feel right about Friday's action.
We've mentioned, for years, how NYSE specialists set up false appearances in the market. Here's a 2009 version:
Manipulating the Dow Jones Industrial Average
Back in the bad old days, the specialists* in the Dirty Thirty would move their own books around to their personal benefit but from time to time would coordinate their efforts.That was posted three days before the market bottom in March 2009 with this final note:
The classic move would be to position for a decline while giving the impression to the investing public that "Hey, the water's fine, come on in".
They would do this by shorting the lower priced DJIA components while maintaining the higher priced stock, or even taking those up a bit.
When the trap was sprung, those higher priced stocks would be collapsed, triggering stop loss limit orders to feed the fear, and nary a specialist bid in sight. As the ticker spread the story to the country, the sell orders would come pouring in and accelerate the down move. Then the margin calls would go out, literally stripping stock from the accounts of the unwary....
...If these were the bad old days, and one were looking for the opposite move, up rather than down, then one would look for a way to paint a negative picture, perhaps by taking a high priced stock down while the lower priced issues were firming up.It's part of the Grassy Knoll theory of investing. And when I mention it it's only half tongue-in-cheek.
That's how they used to do it in the old days*....
And here' Wall Street on Parade, not tongue-in-cheek:
Charts Suggest the Dow Index Is Being Painted to Get “New Highs” in the Market
What we need today is a real life character like Vinny Gambini in the movie My Cousin Vinny to take over the questioning for the U.S. Senate Banking Committee – like Ferdinand Pecora did in the early 1930s to root out the systemic frauds in the stock market of that era. Gambini would haul the heads of equities trading for each of the major Wall Street banks and their Dark Pools to a hearing, put them under oath, and grill them about the highly suspicious trading activity that is going on in today’s markets.
Let’s start with what happened yesterday. In the face of punk earnings forecasts for the rest of this year and a growing global economic slowdown, the Dow Jones Industrial Average hit a historic milestone, closing above 27,000 for the first time. But the rising tide didn’t lift all boats: eight of the Dow’s 30 stock components closed in the red. Those stocks were Chevron, Verizon, McDonald’s, Apple, Travelers, Johnson and Johnson, Pfizer, and Merck.
There was something else that raises suspicious red flags to veteran chart watchers. A big spurt in some of the Dow stock components magically occurred in the final 15 minutes of trading, like some mystical, invisible hand had decided to levitate these share prices before the closing bell.
To the thinking of Wall Street veterans who are still capable of human intelligence, as opposed to relying solely on algorithms and artificial intelligence software, when there is an unnatural spike in prices toward the end of the day and it occurs on abnormal trading volume, it’s not likely an intervention by the Gods of the market but far more likely that someone (or a cartel that we see so frequently these days) is painting the tape.
Here’s how Investopedia defines “Painting the Tape”:
“Painting the tape is a form of market manipulation whereby market players attempt to influence the price of a security by buying and selling it among themselves to create the appearance of substantial trading activity…Manipulators may paint the tape near the market’s close in an attempt to boost a stock’s price substantially at market close. Closing prices are widely reported in the media and are closely watched by investors.”
It only takes a handful of high-priced stocks to really move the needle in the Dow. That’s because it’s a price-weighted index of just 30 stocks. As Mark DeCambre at Dow Jones’ MarketWatch reported yesterday after the market closed, just three stocks in the Dow have been responsible for 970 points of that 1,000-point move in the Dow since its 26,000 milestone on January 17, 2018. Visa accounted for 390 points; Microsoft accounted for 324 points and McDonald’s accounted for 256 points. That’s not exactly what one would call a broad-based rally.
The share price of both Microsoft and Visa spiked in the final 15 minutes of trading yesterday on unusually heavy volume compared to the rest of the day. (See charts below.) And the same thing happened in Verizon and WalMart, also components of the Dow....MOREI don't know about the conspiracy but I do know something about the action still does't feel right.
By-the-bye, our bull market top-tick target remains 3,300 on the S&P 500 (3,010.71 last) so there is still enough upside to warrant riding the bubble but something odd is going on right now.
Recently:
Capital Markets: Your Love Is Lifting Me Higher
Just a Reminder: Riding the Bubble Can Be Very Profitable
And in Société Générale's Albert Edwards: "There Is An Earthquake Happening In Government Bonds":
Second quibble: Whether you are using the 3 mo./5 yr; the 3mo./ 10 yr. the 2's/10's whatever, the period after the inversion can give you stupendous equity returns so we are faced with the decision whether-or-not to play a dangerous little game, riding the bubble knowing full well it is a bubble or retiring to the sidelines.
We'll have more on the time lags between yield curves going inverted and equity downturns and recessions later this summer but for now one of our favorite economists with one of our favorite stories.
