Are The Markets Rigged?

| April 23, 2010 | 0 Comments

The market rally of the past year has been a whopper.  It has gone up farther and lasted longer than most thought possible.

Each passing day brings more upside.  With few exceptions, the market is treating all news as good news.  The market is starting to seem like a one way street…. straight up.

For short term traders, buying the intraday pullback has been the trade du jour for the last two months.  It has literally worked nearly every time.

Some traders are getting so confident they’re beginning to think they can’t lose.

Some are even going so far as to say the markets are “rigged”…

That’s right… Some think the markets are rigged.  Ridiculous as it may sound, this belief is starting to gain traction amongst quite a few traders and investors.

The theory goes something like this…

“The Federal Reserve and the U.S. government will stop at nothing to re-inflate the stock market.  They know the stock market is a direct reflection of economic confidence for the country.  What better way to instill confidence than by juicing the stock market to new highs?”

But wait it gets even better…

“The Plunge Protection Team (PPT) won’t let the markets go down.  The markets are going to break all time highs.  You simply can’t lose…”

Now, I’ll admit the markets have gone higher than I thought they would…

But I don’t believe some secret government entity is gunning the markets.  In fact, the idea of a rigged stock market is ridiculous.  Why?  Well, think about it…

If the markets were rigged to only go up, it would push stock prices to fundamentally unsustainable levels.  It means the rigging would have to go on forever.  As soon as whoever is doing the “rigging” stops doing it, the markets would crash.  The constant bid under the market would be taken away.

It would be self defeating in the long run.  The worst thing possible for investor confidence would be another nightmarish market meltdown.

So I have a lot of skepticism about the rigged market theory.

However, the recent market action does suggest someone supplying a constant bid under the market.

But it’s not the PPT…

I think its late comers to the rally.  A lot of financial advisors, money managers, and individual investors were scared to death in early 2009. They missed the bottom and are now putting money to work any chance they get.  They feel the “coast is clear” now.

You can see this in recent money market fund outflows.

According to Morningstar, money market outflows in the first quarter of 2010 were the highest on record.  Investors are leaving the safety of the money markets.  They’re seeking higher returns in the stock and bond market.

In my opinion, they’re a bit late to the party…

I also think the recent rally has a lot to do with banking institutions.  Many of them have been getting cheap loans from the Fed and putting it to work in the equity markets.  Those cheap loans from the Fed were supposed to be lent out to consumers.

Instead, the majority of cheap Fed money is being driven into the markets.  Banks are chasing higher stock market yields to rebuild broken balance sheets.

But here’s what’s really crazy…

Both theories lead to the same conclusion.  Either way, stocks are being pushed to fundamentally unsustainable levels.

Maybe it’s the PPT (as some of the more gullible investors claim, I seriously doubt it).  More likely it’s just a lot of late comers and banks creating a speculative frenzy…

The bottom line is this…

Whenever I hear that investing in the markets is a “can’t lose” proposition, I start looking for a place to exit my long positions.

The last time investing in the markets was this easy was in 2000 and 2007.  And we all know how that ended…

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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