Monday, February 8, 2010

12pm, 1pm, 2pm...Houston We Have Lift Off. Plunge Protection Team's "Mission Accomplished"

After a horrible trading session on Thursday Feb 4, during which the S&P fell nearly 35 points on accounts of the sudden onset of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) sovereign debt crisis, Friday started off no different. In fact overnight equity futures were deeply negative with equity markets poised to follow Thursday's downward action. But just when every short was beginning to salivate, the market staged a sudden miraculous rally beginning exactly at 2pm. This in the face of no resolution of the PIIGS crisis. As far as the S&P 500 was concerned the PIIGS crisis had dissipated just as soon as it arrived.
Aah yes, what would a bull market be without the ubiquitous Plunge Protection Team? If you guessed bear market, well done.
As we have demonstrated before in our report S&P Futures being used to Ramp Up Equity Markets, stock price action these days is anything but random. Stock prices do not always exhibit a random walk as many financial engineering professors would like you to believe. Instead on many instances there is an invisible hand conducting the stock market orchestra.
And there is good reason for this. Because stock markets have become the perception barometer of economic strength, it is now a matter of national security to keep them sufficiently buoyant. It is not just AIG that has been put in VIP category, it is the ENTIRE U.S. stock market. After the nightmare of Sept 2008, the government is simply not willing to risk another bottomless nosedive.
To understand the manipulation going on in the stock market we enclose below intraday trading profiles (Friday Feb 5) of the e-mini S&P 500 futures, the S&P 500 ETF (SPY) and representative banking, commodity and transportation stocks. Looking at the intra-day trading profiles we can conclude that:
  1. On Feb 5, at exactly 2pm the E-mini S&P 500 futures began to rally. This rally was replicated across the board in almost all stocks, especially those in key sectors such as banking, commodities and transportation.
  2. In any stock market one would expect the intra-day trading pattern to vary between stocks as investors buy and sell securities based on their individual stock/sector specific characteristics and demand/supply situation. In other words if we compare two stocks say Goldman Sachs and U.S. Steel their intra-day pattern should be completely different. Even if there is a sudden news item that causes the market to collectively rally, the ramp pattern should differ. In Friday's case there was no significant news that hit the tape at 2pm. But the market inexplicably reversed direction and started rallying at exactly 2pm.
  3. We believe that the plunge protection team was in action from the very start on Friday. But they really kicked into gear when the market started declining after London close at 11.30am. Observe that, from 9.30am to 11.30am intra-day trading patterns show some variations as stocks still trade on their individual/sector characteristics. But from 2pm onwards the randomness is sent packing and they all start rallying in sync.
  4. Another noteworthy point is that the rally was centered in bank stocks - those most affected by the PIIGS crisis. Because the financial crisis has been concentrated in the banking sector, their stocks have become the markets leading directional indicators at the present time. Bank stocks led the decline in 2008, the rally of 2009 and are continuing to dominate the market's direction in 2010. The leader of all these bank stocks being Goldman Sachs. To follow the markets direction one only needs to look at what GS does.
  5. The reason such a synchronized rally is highly suspicious is that in the absence of an extraneous event (such as the fed raising rates) the only way ALL STOCKS can collectively lift off at exactly 2pm is, if someone bought a huge slug of S&P 500 futures. The amount of futures that needs to be purchased to set off a reversal in the market's direction is obviously way too large for any one institutional investor. Thus our thesis of a much larger invisible hand at play.
Two conclusions to be drawn from this are:
1) Do not short on the day after a huge market decline/correction. Your positions will be smoked out by the plunge protection team.
2) These days it is foolhardy to trade equities without keeping an eye on the futures markets. Derivative markets have long overtaken the underlying spot market in size and activity. Conventional derivatives text books teach that the derivative markets are a function of the underlying spot, i.e. the spot market is the independent variable and the derivative market derives its value and hence direction from the spot. Reality could not be farther from the truth. In fact things are exactly the opposite. Derivative markets now drive the spot market activity, i.e. S&P 500 futures drive the stocks in the S&P 500. So trading equity markets without focusing on futures market activity is a path of sheer suicide. Derivatives markets, wildly unregulated, allowing unfathomable leverage levels are now the big forest where the plunge protection team hides to smoke the shorts out.

E-mini S&P 500 Futures - Friday, Feb 5
S&P 500 ETF: SPY

Goldman Sachs: GS
JPMorgan: JPM
Bank of America: BAC
U.S. Steel: X
Potash: POT
FedEx: FDX

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