Sunday Musings: Conspiracies

I am not a believer in conspiracy theories, but occasionally I have voiced my opinion during the past 9 months questioning the fundamentals driving this market rebound. While fundamentals do not influence my decision making process in regards to trend tracking, I do try to evaluate the economic landscape.

Predominantly questionable economic news reports have made me wonder where all this market support is coming from. Friday was one example when a horrific jobs reports report, at least compared to expectations, left the markets unscathed with the major indexes closing higher.

It’s a well known fact that the Fed has manipulated interest rates in order to support and speed up an economic recovery. I have sometimes wondered whether the Fed has given a helping hand and supported the stock market as well by pumping in a few trillion dollars.

Of course, I can’t be sure, but I consider it a possibility. Hat tip goes to Random Roger, who featured a couple links on this topic. One is titled “TrimTabs on that US government rigged stock market:”

TrimTabs Investment Research Asks Whether Federal Reserve and U.S. Government Rigged Stock Market, Pushing Market Cap up $6+Trillion since Mid-March

Only Logical Conclusion as to Why Market Soared, While Economy Faltered and Traditional Sources of Capital Remained Neutral

Sausalito, Ca, Jan. 5 – TrimTabs Investment Research CEO Charles Biderman in a special report said today that it wasn’t traditional sources of capital that pushed the U.S. markets up more than $6 trillion since March, and wondered whether it was the Federal Reserve and the U.S. government pulling the levers behind the sharp rise.

“We have no way of proving this,” said Biderman, “but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities.”

Biderman warned that if government has been behind the sharp stock rise, it could trigger a major equities meltdown when the government stops buying and even worse, starts selling.

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P; 500 futures. Moreover, several officials have suggested the government and major banks could support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”

In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.” In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of “an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem.”

There are many more details available, so if this topic interests you, follow the above link.

Again, I can’t be sure whether any of this played out along these lines, but by just having watched market behavior, I have had similar thoughts.

I am sharing this with you to point out that this remote possibility exists and to make sure you do not become complacent during this rally. Sooner or later the trend will come to an end, maybe abruptly, so be sure to know where your sell stops should be, and be prepared to act when market behavior tells you to do so.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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