So You Still Don’t Think Markets are Manipulated?

As readers may be aware I teach a strategy called Market Correlation. Market Correlation is the attempt to determine market direction on a daily basis. In a normal market these rules generally work 70-80 percent of the time. Recently we’ve noticed divergence between where the markets should go based on these rules and where they actually end up at close of a market session.

So what’s going on here? Why isn’t this working now?

Why is it when left to its own accord the markets follow these rules to the letter yet now in recent times it isn’t? To answer this question we need to delve back into history. In 2007 the Dow hit the 14,000 level and everyone thought this was nirvana. The prevailing thought in everyone’s mind was “this is going to the moon and it’s never going back.” People rushed to get into equities as history had shown that the buy and hold strategy was the best for the passive investor. Brokerage firms made it a point to show that if an investor had bought stocks in the 1920’s they would have realized a 26% return on their investment by doing nothing more than just hold onto their equities. In 2008 we knew better (or should have) because that was the year that many 401K’s turned into 201K’s. This nothing new under the sun as it’s been going on for quite some time.

Want proof?

In 2000 the NASDAQ hit the 5,000 level and again everyone though the exact same thing. I recall TV commercials that stated “we’re in the sweet spot now” and nothing could be further from the truth. If you study business and market history and go back further to the 1920’s you would see the same phenomena occur. Just prior to the stock market crash of 1929 the exact same thing occurred. The Smart Money aka institutionals kept pushing stocks even though the warning signs were apparent that something wasn’t quite right. So what causes this and why do investors make the same mistakes?

Markets are ruled by two emotions: fear and greed.

The fear of either losing out on a trade already made or the fear of not being in the market to capitalize on a potential trade. The Smart Money knows this all too well and uses it to their advantage. You know who else knows this? Have you ever gone into an auto dealership to buy a new car? They know this too because they position the sale as an “unbelievable deal” and if you don’t buy now, you’ll lose out. I know this because in my past life I’ve consulted with many auto dealerships and they’ve all come to the same conclusion. One manager told me once: “it’s the American dream to get something for nothing and if I don’t position this as an unbelievable deal, they’ll never buy.” The Smart Money knows this too.

Greed. Greed takes on two forms: Institutional and Investor. Investor greed stems from either a goal not being met or the reluctance to exit a trade once it’s gone against you. The mindset seems to be “it’ll come back.” Therefore investors hang onto losing trades (either futures, stock or currencies) thinking that “it’ll come back”. These people do not trade with a plan. They have no exit strategy because there’s a sense of finality once a trade is exited. Institutionals are quite different. They know all too well what they’re doing. Right now they’re throwing capital at the markets because they want the markets to rise. Why? Because they’re generous? No. Because their game plan is to prop up the markets to the point that they want and then short it to death. Oh, by the way they’ll make money on the downside as well. The reader might be asking why and how does this phenomena exist? The answer is because no one measures anyone on a long term objective, everything is measured now, this year. I saw this situation in the 1990’s when I was a software consultant. I’ve had the unique opportunity to interview management personnel at the Fortune 1000 and one thing was clear; “if I can’t show an immediate result, this is of no use to me at all.” The same situation occurs at the Smart Money. Their CEO’s are measured on a quarter-by-quarter basis and if they miss two quarters in a row, shareholders will bolt for the exits. This same situation occurred with every downturn the market has ever had. Don’t you think that the institutionals knew in 2007, 2000 and 1929 that what they were doing was wrong? Of course they did but at the end of the day if they could a profit by their actions, no one would care. This is why they keeping getting regulated but don’t worry, they’ll figure out a clever workaround to whatever regulation is imposed.

Lastly we have traders/investors. Most traders don’t want and have no desire to do any of the work required to become successful traders. They are constantly on the lookout for the “Holy Grail or Silver Bullet/Magic Indicator “that’s never wrong and always works. Sadly no such thing exists and if it did the whole world would be using it. So what do they do? They rely on someone to tell them where to get in, when and where to exit and they follow it. Why? It’s easy, hey I don’t have to do any of the work, I’ll just subscribe to so and so’s technical investment advice and follow it. What they fail to realize is that no one and I mean no one is right 100% of the time, yet that’s what they expect. How do I know this? I talk to these people each and every day and it never fails to astound me as to what their expectations are. Trading is work and every successful trader knows this. It takes years of study, research, testing, trial and error to get something remotely correct yet most traders and investors fall into this trap. Why? It’s the American dream to get an “unbelievable deal”. My best subscribers are those that tell me “I know how to trade; I don’t need someone to tell me how to do that. What I have problems with is direction”.

So what do we have?

We have fear and greed running rampant; we have the Smart Money who want to make money no matter what and are only concerned with the next 12 months and traders who refuse to do the work necessary to become successful. Right now as I write this the Smart Money is planning to propel the markets forward and I have no doubt they’ll do it. But know this, they’ll drive up to a certain level and sell it short, taking everything in its path and they will have no qualm taking your hard earned capital. Don’t be one of those people. Take the time to educate yourself and prepare. We offer a one week trial for our services. Try it and see for yourself.

About the Author
Nick Mastrandrea is the author of Market Tea Leaves, a daily newsletter that is dedicated to your trading success. We teach and discuss market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to all subscribers. [space height="20"] [social type="twitter"][/social] [social type="google-plus"][/social] [social type="youtube"][/social]

Leave a Reply