July 16, 2002
Yesterday's late-hour market snapback is certain to rekindle rumors that the major stock market indexes are manipulated at crucial times – possibly with the Treasury or Federal Reserve as a conspirator.
Whether those rumors are true or not – and I believe they probably are – there is no question that yesterday's late recovery did not involve small investors: It was an institutional phenomenon.
The reason that questions will be asked is that market breadth was much worse than the performance of the indexes. For example, on the New York Stock Exchange, losers topped gainers 3 to 1, although the Dow Jones industrial average was down only 0.5 percent and the Standard & Poor's 500 down only 0.4 percent.
The Dow was down 440 at one point; a steep ascent in the last hour and a half trimmed the loss to 45.34.
It was somewhat reminiscent of Oct. 20, 1987, the day after the huge market crash, when stocks were plunging a second day, but suddenly recovered and closed up 100. But losers topped gainers 3 to 1.
It was widely assumed at that time that index futures were manipulated, perhaps with the connivance of the Fed. It worked. Markets recovered.
Skeptics believe that when the market is sinking too fast, the Fed and/or Treasury call the big houses on Wall Street and tell them to buy index futures and options. The short sellers – who bet the market will go down – immediately smell a manipulation, and hurriedly cover their shorts by buying stocks. Then buyers, believing there is a rally afoot, jump in.
Down volume doubled up volume on the New York Stock Exchange, says Kennedy Gammage of La Jolla's Richland Report. Such statistics "suggest the crisis-control team was at work," he says.
In response to a command from Washington, D.C., the large Wall Street houses bought call options on indexes and on the stocks that have the most weight in the indexes, he says. The houses also buy futures, he says.
European markets closed down 5 percent yesterday, well before the U.S. exchanges closed. The dollar was weak. Foreigners have been pulling money out of U.S. stocks. "The smart money in Europe is skeptical about our markets," says Gammage. Early in today's session, market technicians will try to determine whether overseas money is buying or selling.
"Barring any kind of news that would influence things one way or another, Europe will recover (today)," says E. James Welsh of Carlsbad's Welsh Money Management. He believes yesterday's rally was rigged. "Obviously, somebody came in and did purchasing of S&P (Standard & Poor's) futures," says Welsh.
"It could have been the Fed or the Treasury – as surreptitiously as possible," he says. Then the shorts covered, buyers jumped aboard and stocks zoomed back. The rally could continue, "But the ultimate low in this bear market is quite a bit lower."
Richard Russell of La Jolla's Dow Theory Letters says, "Maybe you can't call it manipulation," but a lot of mutual funds, some huge, jumped in and did buying.
He's skeptical of the rally gathering much momentum. "When you get a big down day and a recovery during the day, it has to go to a plus day, otherwise they are burning up ammunition," he says. "We just saw them burning ammunition."
He's not sure if there is a crisis-control team. Other countries such as Japan openly buy stocks to prop up the market. And many countries try to drive their own currencies up or down.
"Large institutional investors came into the futures area, it spilled over into short covering, and then there was bargain-hunting," says Tom Clutinger of Clutinger Williams & Verhoye.
But although it might have been a technical move yesterday, he believes that stocks are near a bottom and the long bear market – one of history's worst – is near an end. "If there is a summer rally, we will have corporate news to support it," he says. |
