Is the Stock Market Rigged? … and a More Important Question

Is the stock market rigged? Many believe it is … and rightfully so.

However, there are more interesting and pertinent questions, such as:

  • To what extent is the market rigged, and how does it affect me?
  • Why do allegations of a rigged market sprout up right now?

Different Ways to Rig the Market

There are different ways to ‘rig’ the market, and there are different entities to do so.

  • High frequency traders attempt to gain a time advantage.
  • Inside traders try to get information ahead of the crowd.
  • The Federal Reserve and central banks around the globe aim to prop up equity markets via various types of quantitative easing or low interest rates. The chart below plots the S&P 500 against the actual QE liquidity flow to illustrate the correlation (or lack thereof, may the reader judge) between stocks and QE.

Regardless of the exact correlation between QE and stocks, even the Federal Reserve’s own research admitted that FOMC meetings drove the S&P 55% above fair value (more details here).

But none of the above is new or shocking.

Why Now?

Perhaps more interesting than who and how is why now?

Isn’t it curious that articles and charts (like below) about central bank liquidity driving up stocks are popping up just as the S&P 500 is breaking to new all-time highs?

There were no such claims last August or early this year when the S&P traded below 1,900. Seems like investors (and fund mangers) are fishing for excuses.

As the chart below shows, investors and fund managers were clearly under-invested at the recent lows. 3 out of 4 large cap fund managers got beaten by the S&P 500 in 2015. How to explain such dismal performance?

Central bank liquidity is a welcome scapegoat. Fund managers could (and do) essential argue: “Our research suggested lower prices, but central banks stepped in and unexpectedly buoyed stocks.”

Boycotting Yourself Out of Profits

This is the most hated stock market rally ever, that’s why it’s gone on for so long.

Today’s market hater is tomorrow’s buyer (disgruntled, but ‘better late than never’). As long as this cycle perpetuates, there’s more up side. We observed this back in 2013: QE Haters are Driving Stocks Higher

Boycotting the market by avoiding stocks may feel like the ethical thing to do, but it hurts the portfolio.

There is no question the market is rigged to some degree, but that’s not necessarily a disadvantage for open-minded investors.

Rigged or not, the stock market has responded reasonably well to time-tested indicators. A number of them pointed to a strong stock market rally.

The key question is not whether the market is rigged, it’s how do you handle a rigged market? Now is the time to be the best informed investor you know.

The latest indicator-based S&P 500 forecast is available here: Stock Market Melt-Up Alert?

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

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Will the 3 Best Investing Tricks of 2013 also Work in 2014?

The best investment strategy in 2013 was: “Stay long until you are wrong.” This sounds easier than it actually is, but there were 3 specific patterns and tricks that continually kept investors on the right side of the market.

Every dog or cat has its own little personality. Like most animals, every bull market too has its own personality. Sometimes even every individual bull market leg has its own character and features.

Being aware of those idiosyncrasies may make the difference between making and losing money.

For example, the first installment of the QE bull market saw some violent corrections, such as the May 2010 Flash Crash and 21% S&P 500 correction in 2011.

Since 2012 however, the S&P 500 and its other index cousins have been on cruise control with just minor speed bumps.

2013 sported some very clear and repetitive patterns. Those patterns have kept aware investors on the right side of the trade. What were those patterns?

3 Most Predictable Patterns of 2013

1) “Persistence wears down resistance.” This was probably the Profit Radar Report’s most commonly used phrase in 2013.

Persistence around resistance basically means that sideways trading generally serves as a launching pad for the next rally leg. This point was illustrated by the S&P 500 chart below (published by the Profit Radar Report on September 20, 2013).

2) Investors begrudgingly accept the bull market, and vocal bears are driving the bull market higher.

Although a number of sentiment bulls waived a warning sign early in 2013, the Profit Radar Report shared this observation and conclusion previously back in March 2013:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Jones Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

According to the financial media, the S&P 500 (NYSEArca: SPY) should have tumbled many times in 2013, but it didn’t.

Obviously there were still plenty of bears left to be converted into bulls, a process that drives up prices. It wasn’t until very recently that sentiment has become bullish to a degree that’s worrisome.

The simple investment trick to profit from these patterns has been easy. Stay long until you’re wrong.

When Are the Bulls Wrong?

3) But how do you know when you’re wrong? In other words, how do you maximize gains with the least amount of risk?

Here’s where an evergreen pattern comes into play. This pattern is so powerful, I call it insider trading.

Click here for a fascinating explanation of this insider trading trick along with brief visual trivia and the key ‘insider trading’ level for the Dow Jones. Insider Trading Just Became Legal

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Has the S&P 500 Begun a Bigger Correction?

Reality just paid a visit and Wall Street didn’t like it. All major U.S. stock indexes are lower so far in January. Historically stocks have a hard time recovering from early January losses, so is this the beginning of something bigger?

In 1998 the S&P 500 lost 4.4% into its January 12 close. This was the last time the S&P 500 recovered from losses far into the month.

Since 1928, the S&P 500 recovered early January losses only 29%. When early losses were less than 2%, the S&P 500 recovered 37.5% of the time.

These stats are not entirely without merit, because 76.6% of the time (since 1950), as January goes so goes the year.

But let’s take a look at the S&P 500 chart. So far, the 2014 down days are just a small blip on the chart.

Nevertheless, we see that the S&P 500 (NYSEArca: SPY) ‘blipped’ out of a tight one-week trading range and sliced below initial support at 1,823 yesterday … a rallied back above 1,823 today.

1,810 seems to be a major inflection point for the S&P 500. There are two reasons why bulls may be able to pull out a ‘stick save’ here:

  1. The S&P 500 didn’t quite touch our ideal Fibonacci up side target.
  2. The S&P 500 has not moved below 1,810.

Inflection points are sweet spots for investors, because they often provide low-risk trading setups.

Identifying and taking advantage of inflection points is almost like insider trading. It gives you an edge. Here’s how to get an edge over the ‘herd.’

Insider Trading Just Became Legal – How to Get Your Edge

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Insider Trading just Became Legal

Only a small group of Americans is allowed to legally trade based on insider information. Fortunately for the rest of us, there is a perfectly legal trick to get an edge. All that’s needed is a computer, a set of eyes and some study time.

Congressmen are legally permitted to trade based on insider information.

There’ve been cases where even the Federal Reserve leaked information to Wall Street before it hit the newswires and average mortal investors.

High Frequency Trading (HFT) is not considered insider trading, but – like insider trading – HFT is based on information not yet received by ‘the herd.’

Legal ‘Insider Information’ for Everyone

Unbeknownst to many, investors also have access to legal ‘insider information,’ but most don’t take advantage of it. All it takes is a computer and watchful eyes.

Allow me to illustrate the power of legal insider info (do not peek ahead to the second chart). Take a look at the S&P 500  chart below. Do you see anything suspicious?

You should, because all the information you need to pocket a 15%+ profit is right there.

Now take a look at the same S&P 500 chart.

One single line changes the complexion of the entire chart. More than that, trading based on the red line break down resulted in a gain of 200+ S&P 500 (NYSEArca: SPY) points to the upside (green ovals) and 200+ S&P 500 points on the down side (red oval).

The red line provided strong support on several instances (green ovals) and a break below support (red oval) was an obvious sell signal. In my actual July 28, 2011 (one day before the red oval break down) note to subscribers, I warned that: “A break below the red trend line may trigger panic selling”.

The legal ‘insider information’ available to everybody is support/resistance (S/R) levels.

S/R levels work like subway stations. Imagine a New York subway, it can stop anywhere but is most likely to stop at the next station. S/R levels are the most likely place for the market to turn around and reverse trend.

When the market moves beyond one S/R level, it is likely to move on to the next “station.” Once resistance has been broken, it becomes support and once support has been broken it becomes resistance.

The Biggest Benefit of S/R Levels

S/R levels allow us to pinpoint low-risk buy, sell, and stop-loss levels.

The real beauty of S/R levels is that they let us know exactly when we are wrong. There is nearly no guesswork and we can enter any trade with confidence that even the worst-case scenario would be only a small loss. Nearly every trade against S/R levels is a low-risk trade.

Here’s a very recent example.

The Dow Jones  chart below shows the recent collision of the Dow Jones with long-term trend line resistance.

The initial attempt to move above resistance was met with selling. After re-grouping, the Dow Jones was able to move above resistance and accelerated from there. Prior resistance is now support for the Dow Jones (NYSEArca: DIA).

The Profit Radar report went short at Dow Jones 16,100, covered the short position at 15,745 and noted that a move above the trend line means that the rally is ready to resume and quite possibly accelerate (unfortunately we didn’t get to go long the Dow or S&P 500 as the reversal after the Dec. 18 Fed meeting was just too quick).

This strategy doesn’t just work on paper. The worst trade (in terms of performance) recommended by the Profit Radar Report in 2013 is a 1.02% loss.

Simon Maierhofer is the publisher of the Profit Radar ReportThe Profit Radar Report presents complex market analysis (stocks, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. We are accountable for our work, because we track every recommendation (see track record below).

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

How The Federal Reserve Gives Insider Trading Tips to Big Banks

Investors have no clue what goes on behind closed doors at Wall Street banks and the Federal Reserve. But once and a while a juicy piece of information (probably overlooked by censors) provides a glimpse of Wall Street’s carefully guarded secrets.

The New York/Washington Banksters do a good job of keeping internals hidden, but once in a while a juicy nugget escapes. Those kinds of nuggets make investors lose faith in everything Wall Street, that’s why Banksters like to keep them secret to begin with.

Insider Tips from the Federal Reserve?

On August 17, 2007, the Federal Reserve cut the discount rate from 6.25% to 5.75%. The Fed is quite careful about changing the discount rate, and when it does it’s usually only tweaked by 0.25%. The 0.5% cut on August 17 was ‘unexpectedly’ drastic.

The Fed regularly releases transcripts of its policy meetings with a 5-year lag. Courtesy of such a release we are now getting a glimpse of what happened leading up to the August 17, 2007 meeting.

In an August 16 video conference call, Timothy Geithner (back then president of the New York Fed) said banks “obviously don’t have any idea that we’re contemplating a change in policy.”

Jeffrey Lacker, head of the Richmond Fed, questioned Geithner’s statement and asked: “Did you say that they are unaware of what we’re considering or what we might be doing with the discount rate?”

What reason did Lacker have to question Geithner? The transcript continues: “I (Lacker) spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility.”

In a statement provided to Reuters last Friday, Lacker reiterates: “From conversations I had prior to the video conference call on August 16, 2007, I was aware of discussions among a few large banks about borrowing from their discount windows to support the asset backed commercial paper market.  My understanding was that (New York Fed) President Geithner had discussed a reduction in the discount rate with these banks in connection with these initiatives.”

What’s the Difference?

What difference does this make you may wonder. The chart below provides a nice visual. The Fed hasn’t had a chance to lower rates in years, but right before the financial crisis interest rate announcements sparked anticipation like nothing else.

At 2pm on August 16 (a day before the official announcement), stocks started to soar for no apparent reason. The S&P 500 jumped 45 points within a matter of hours and recorded its best gain in 4 ½ years.

Financial ETFs like the Financial Select Sector SPDR ETF (XLF) soared as much as 16.95% that day.

The SPDR S&P Bank ETF (KBE) gained as much as 7.26% that day.

Over the next few weeks, the S&P 500 continued to rally more than 200-points. It went as high as 1,576.09. The rest is history with still much mystery.

Although with a more than 5-year time-lag, we now find out that the Federal Reserve kindly gave the big banks a friendly heads up.

The Treasury declined to make Geithner available to comment. Spokesmen for the Federal Reserve Board in Washington, the New York Fed, Bank of America, and Ken Lewis all declined to comment.