Following are three of the main underlying reasons why I feel that today's markets highly manipulated.:
Factoid #1: Yesterday, according to ICI, the organization that tracks mutual fund flow, we saw another $1.9 billion in equity mutual fund outflows. This is the 21st consecutive week that the equity flow has been negative, and over this 21 week period, the total equity outflow totals over $70 billion. You can click [here] to see the ICI report from Sept 29, and click [here] for the ICI's historical report. The clear text translation of this fact - individual investors have taken $70 billion out of stock market via stock related mutual funds over the past 21 weeks. Where has this money gone? Well if you carefully reviewed the ICI report from 29 Sept, you'll see that a huge amount of money has been going into bond related mutual funds.
Commentary: Okay, so you're thinking, "Great, SingleMalt...so what". Well folks, lets go back to the basics here for a second, and I'll keep this short and sweet. In a normal market, prices rise as a result of buying and prices fall as a result of selling - that's about as simple as I can make it. The $1.9 billion in outflows that I mentioned above is $1.9 billion worth of stocks that have been sold in one week, bringing us to $70 billion worth of selling in the past 21 weeks. And just to clarify, these are both "net" figures - meaning that after accounting for all of the people who were buying equity mutual funds, then subtracting those who were selling equity mutual funds, we end up with a negative number (outflow), otherwise known as net selling. Based on the most basic market premise I just spelled out above, net selling should result in prices falling in the market place. Have they? Let's take a look and see.
The above chart is courtesy of the diligent folks at Zerohedge, with source data from the ICI - please click [here] for their original post from last week. As you can clearly see, despite massive net selling, not only has the market not fallen, it has actually been rallying over the past several weeks. How can this be? In a normal market, this would be impossible. Therefore, I label this as Exhibit 1 in support of my premise that this is a broken and manipulated market.
Factoid #2: We have just seen above that the average investor has been leaving the market in droves. Now when did this exodus begin in earnest? Well, selling started in late April but truly started accelerating the week of the Flash Crash, which occurred on May 6th of this year. For those of you who are not familiar with the Flash Crash, here are a couple of charts showing how the DOW lost 600 points in 6 minutes and 1,000 points in less than 15 minutes. If you click on the charts, you'll be able to read a full commentary.
The chart above is on a 1 minute time scale, and the chart below is on a daily time scale.
A group of really smart guys over at Nanex have done a complete forensic analysis of the Flash Crash, and have been able to prove that this event occurred as the result of what is known as High Frequency Trading (HFT), and in particular, a by-product of HFT called quote stuffing. This is a very complicated and lengthy topic to go into, so I will simply provide you with a Wikipedia link [here] for a basic definition, a link [here] to a Wall Street Journal article and a link [here] to a recent Zerohedge post, where Nanex has allowed them to post more of their data. If you want more, do a search of the Zerohedge archive, or google the topic. The bottom line, HFT practices were responsible for the Flash Crash, and ever since the Flash Crash occurred, investors have been abandoning the market in droves because they no longer have confidence in the market structure
Commentary: So what's the big deal, you ask? Well let's once again go back to the basics. Most investors, or at least those with any common sense, place a market stop loss order against any long stock position they have in their portfolio. Mutual Fund managers and large institutional investors typically do the same. For the non-traders out there, this means that if I buy 100 shares of ABC company at $50/share, I'm naturally hoping that the price will rise over time and I'll make a tidy profit. But lots of things can happen, and there's always a chance that the price will fall, so I place a stop loss order at a specific level, in order to minimize my down-side risk For sake of illustration, let's say that in this instance I want to cut my loss to no more than 10%, so I set my stop loss at $45. Once I've placed this order, I don't have to worry about watching the market all day, every day. I can go about my business and if the stock price happens to tank, I know that I'll be out at $45 with a minimal loss. Everyone following me? Good. So, now what happens in a case like the Flash Crash? Well, you're basically screwed, because the entire market, virtually every single stock that was trading, tanked at the same time. Translation, if you had a 10% stop loss set on all of the positions in your portfolio, you just took a 10% haircut on your entire portfolio, and in a case like we saw on May 6th, where none of the sell orders were catching a bid, you potentially stopped out for much more than a 10% loss by the time your order cleared. That, my friends, is exactly the kind of instability that investors don't like, and that is why no one wants to have their money long term in stocks any longer.
Now I know there are some skeptics out there saying, "yeah, yeah, SingleMalt, so what? Flash Crash was a one time event, and now everything is okay." Do you really think so? Well let me provide you with some more data. While I will agree that we have not seen another Flash Crash that has impacted the entire market, these same HFT shenanigans have been causing isolated cases of flash-crashitis every since. To wit, please take a gander at the chart below - Progressive Energy (PGN) from this past Monday, 27 Sept.
What you see above is a one minute chart of PGN, showing a drop from 44.60 to 38.38 in less than a minute. In reality, the stock dropped from 43 to 4 in less than one second, but the exchange decided to negate any trades that occurred below 15% off the previous high, so my charts only show the $38 level. However, you can go to these shots from [Zerohedge's] Bloomberg terminal, showing graphic and tabular, second-by-second action of what really happened
Notice the time stamp in the above table...all orders have the same time stamp, which means that within the one second of 9:57:42 before clicking over to 9:57:43, the price goes from $43 to $4.57 and back up to $41. Are you starting to get a grasp of what High Frequency Trading is all about? Milli-seconds, folks. This is the kind of shit that can happen when an HFT algorithm fails. Needless to say, stop loss orders triggering all the way from 40 to 4 made for some pretty unhappy folks, and if you happen to be one of them, I'd be calling your broker and filing a complaint with the SEC or FINRA to get your money back.
This is not an isolated event either - there have been many instances of this over the past several months, spread over many different stocks, and the only people who are in the know, are the professional traders who see this happen in real-time. Bet none of you saw this highlighted on CNBC, huh?
I now lay rest to Exhibit #2 supporting my premise that this market is broken. HFT is clearly one of the primary culprits, so is it any wonder that we've had $70 billion in outflows over the past 5 months????.
Factoid # 3: As I have pointed in several posts over the past weeks, the Fed began POMO activities again in mid August, then has really stepped on the gas pedal in September, injecting billions of dollars each week into the system via the primary dealers (last week POMO total was ~ $10 billion). For those needing a refresher on POMO, click [here] for my previous primer. Coincident with these POMO activities, the market has absolutely taken off, and I warned that this could be a game changer [here], when word on the street was that the Fed would be front-loading a big portion of their Treasurey buy-backs into September.
Commentary: Since I've already provide quite a bit of commentary in my previous posts on this subject, let's jump right to an example of how POMO impacts what normally would be a down day in the markets due to very poor economic reports.
The above chart for the SPY is useful to show what happened on our latest POMO day this past Tuesday.
- At 9:00 AM, still in the pre-market, the Case Shiller Home Prices report comes out and the news was less than rosy.
- at 9:30 AM the market opens, and sells off for the first 30 minutes in reaction to the Case Shiller report.
- at 10:00 AM we get more bad news. Consumer Confidence drops to 48.5 vs. consensus expectation of 52, and the Richmond Fed Manufacturing Report comes in way short of expectations at -2 vs. consensus expectation of +5. The market immediately reacts with more selling (see the big red candle at 10:00 AM).
- But what also begins happening at 10:00 AM? You got it - POMO! From 10:00 - 11:00, the Fed is busy buying up Treasuries left and right from the primary dealers (that's GS, MS, JPM, etc for those who have forgotten), and said dealers immediately take their new found wealth and start pumping the market. The rest, as they say, is history. On a day that normally would've closed in the red, and quite possibly down a lot, we end up rallying like it was 1999 and close near 5 month highs.
And there you have Exhibit 3 in support of my claim that the markets are broken and highly manipulated.
Closing Comments: So as mentioned at the beginning of this tirade, I now leave it to you to make up your own mind. While you may not agree with my commentary, the facts are pretty compelling. But hey, I've been wrong once or twice before...this could be a third. :-) Let me know what you think.
What happens next? I think we may see the S&P make one last run and top out between 1150 and 1165 before rolling over and starting a decent correction. Why? The Fed has front-loaded most of their planned buying in September, so October POMOs should be smaller dollar amounts and have much less impact. I also think we will continue to see negative econ reports. Oh, and let's not forget Q3 earnings season is now upon us. I doubt very highly that we'll see anywhere near the positive earnings reports that we did in Q2 - especially from the banks and financials. Keep in mind, $70 billion taken out of the market by retail investors has had a huge impact on trading revenues for the banks and brokers, and we're starting to see news reports of planned lay-offs at many of these big trading houses. Of course, also keep in mind that the Fed is making up the rules as they go along, so if they instead decide to increase POMOs in October, it'll be, "to the moon, Alice, to the moon!! "
But I'll leave you with one more bearish thought to contemplate before signing off. The chart below is of Wells Fargo (WFC), and the solid purple line is the S&P 500 performance for the same period super-imposed on WFC. Note the almost exact correlation from January through August. Now note the current divergence.
You can see a very similar pattern on most of the bank charts vs. the S&P. Over the past several years, Financials have been leading the market (in both directions), and if that trend continues, what you see here is the banks foretelling a move back down to the lows we saw in June/July. Time will tell....
Good luck trading this silly, manipulated market!
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