Many market participants are starting to see a not so invisible hand at work in the US markets. The series of miraculous marlet turn abouts has people getting paranoid that the whole game is a fix.
There could be a fix in place and it is an easy idea to embrace. After all interest rates are ‘fixed’ and that’s the biggest market of all.
However markets can seem to act like a single person because in the end they are a summation of a lot of people and an average person is very like a unique single person.
You can test this yourself by listening to a crowd singing in a stadium. In the crowd noise is a voice, the voice of a crowd can be heard and it sounds like a very loud single voice.
To me that is the most likely explanation for the market behavior we often see that looks like an individual controlling the action.
I would like to add sometimes a market or a stock is controlled by a person but the bigger the deal the less likely it is to be any single participant controlling even small parts of the markets trading.
That said, the market is acting like one huge support operation. When the US indices slump and get to correction levels, that being 10-15% down, out comes a huge virtual hand and yanks the indices up.
This is either the ‘plunge team’ rumored as being the ‘Presidential working group on financial markets’ or it’s the work of a legion of ‘buy the dippers.’ The religion of ‘buy and hold’ is a solid one and unlike traders who mainly go bust, ‘buy and hold’ investors often do rather well. As such their numbers have swollen over the years. Their second tenant is ‘buy the dip.” “Buy and holds” and “buy the dip” has served many patient investors very well so when we get a dip, there is a natural support after a large correction.
Of course you don’t have to be a ‘buy and hold’ investor to ‘buy the dip,’ I buy the dip because dips make good shares cheap. However I’ll sell the rally too.
I’d like to think it’s the ‘buy the dippers’ but the ‘plunge team’ explanation is tremendously seductive.
Whatever is creating these giant stick saves, it appears to me to be driven by the S&P 500.
I posit that the smoothest indices is the one with the least uncertainty and that therefore exposes the index driving the others through correlation. If this is correct then it’s the S&P 500 that is the mother of the current stock market action.
Here is the evidence
The S&P 500 is the middle performer of the US indices. The UK FTSE 100 index is at the bottom to show how it is driven by the US or at least the same global forces but performing in the long term differently and considerably worse.
The Dow Jones underperforms and the Nasdaq over performs and this might be a function of their respective Beta volatility but if you have any belief in trends a shorter term picture brings up the key question.
Are we in a bull or a bear?
I suspect it’s a bear but the following charts makes it clear, depending on what index you think drives the market, we are actually in no-mans-land.
If I’m correct and the S&P 500 is the key indicator, then we are in a sideways trading band, neither bear or bull and this fits with the idea of the market being propped up.
Either way, the global economy or global liquidity needs to pick up for stocks to start a bullish phase and that seems unlikely when the Fed is calling for rising rates and emerging markets are in a funk.
If energy and commodities stay low and these benefits feed through, then the good times will roll, but it seems that right now there is no startling news to the upside to kick off a bull rally break out anytime soon.
As such the pressure should be to the downside.
That sounds ugly, but it might allow for the ‘buy the dip’ legion to do quite well, as the market yo-yos.
So the take away if you are an investor is to join them and buy the back leg of the W. If you are a trader, look for a break then flip on the bounce.
For those who believe in a coming crash, keep your eyes on China as it is only China that is big enough now to kick the legs out from under the US and European markets and it will take something big to do that.
Then I look for the no-brainer and this is what I see:
It takes a lot of faith to buy the dip and until the S&P makes significant new highs the market will remain on a knifes edge.