, On Friday March 19, 2010, 3:15 pm
EDT
Investing is about putting
the odds in your favor. There are no absolute certainties, but there are high
probabilities.
Recently,
the probabilities have been skewed by extremes that haven't been seen in years,
even decades.
Up until today for example,
In January, the percentage
of bearish investors had reached a record-low level not seen in nearly two
decades. This extreme investor optimism caused the ETF Profit Strategy
Newsletter to state the following on January 16:
'Bullish sentiment has
reached a level where it is suffocating nearly all bearish currents and
undertones. The natural reaction would be to conform to the trend and turn
bullish. We believe that every day that brings higher prices presents a better
opportunity for the bears.'
This opportunity came in
just a few days when the major indexes a la Dow Jones (DJI: ^DJI),
The winning streak, as of
recent, however, has pushed the major indexes to new recovery highs. Those
recovery highs coincide with a number of oddities that are hard to explain,
even concerning. What are they?
Lack of conviction
Many have proclaimed the
beginning of a new bull market, especially with the break through
Average volume for the
month of March has been 1.02 billion shares. The average volume from March 1 to
March 18 over the preceding five years has been 1.76 billion shares. Not a
single March 1 - 18 average has been below 1.7 billion shares.
Investor sentiment
discrepancies
As mentioned earlier, investor
sentiment reached bullish extremes in January 2009. Even though prices are
higher today than at the January 19 highs, investor bullishness has cooled off
significantly. In fact, the percentage of bullish retail investors dropped 9.9%
last week despite steadily rising prices.
The Volatility Index
(Chicago Options: ^VIX), a measure of fear and complacency (low readings
generally foreshadow market declines), has fallen from the January 2010 low, to
the lowest level since May 15, 2008. This is precisely when the post-2007
market meltdown started.
From May to November 2008,
even the best and biggest blue chips stock ETFs such as the Vanguard Large Cap
ETF (NYSEArca: VV - News)
and iShares S&P 100 Index (NYSEArca: OEF
- News)
lost 40%.
Mid cap stocks (NYSEArca: MDY
- News),
small cap stocks (NYSEArca: IYR - News),
individual sectors such as financials (NYSEArca: XLF
- News),
consumer discretionary (NYSEArca: XLY - News),
and materials (NYSEArca: XLB - News)
fared much worse.
This time around, however,
the sentiment extremes and VIX resulted in a minor market top that didn't even
last two months. What is different?
A different kind of
bailout
The chart below illustrates
the government's bailout track record; clearly not impressive. It seems like
Washington D.C. has found a different kind of bailout. Ronald Reagan
established the platform for this different bailout in 1988.
On March 18, 1988, Ronald
Reagan signed Executive Order 12631. Below is an excerpt from Executive Order
12631 - Working Group on Financial Markets - Mar. 19, 1988; 53 FR 9421, 3 CFR,
1988 Comp., p. 559:
'By virtue of the authority
vested in me as President by the Constitution and laws of the United States of
America, and in order to establish a Working Group on Financial Markets, it is
hereby ordered as follows:
Section 1. Establishment.
(a) There is hereby established a Working Group on Financial Markets (Working
Group). The Working Group shall be composed of:
1) the Secretary of the
Treasury, or his designee;
2) the Chairman of the
Board of Governors of the
3) the Chairman of the
Securities and Exchange Commission, or his designee; and
4) the Chairman of the
Commodity Futures Trading Commission, or her designee.
Section 2. Purposes and
Functions. (a) Recognizing the goals of enhancing the integrity, efficiency,
orderliness, and competitiveness of our Nation's financial markets and
maintaining investor confidence.
This quartet has become
known as the Plunge Protection Team (PPT).
What's the PPT's job?
The Plunge Protection
Team's job description is to prevent another 1987-like 'Black Monday' from
occurring (the Dow fell 22.61% on 10-19-1987). How can that be done?
According to John Crudele
of the New York Post, Robert Heller, a former member of the
The existence of the PPT
was verified by former-Clinton advisor George Stephanopoulos via an appearance
on Good Morning America on
What caused the 70%
rally
TrimTabs founder and CEO
Charles Biderman, added further evidence to suspicions many have had for a
while. TrimTabs is a research firm that tracks money flows into the market.
Here's what Mr. Biderman
had to say: 'We cannot identify the source of the money that pushed stock
prices up so far so fast.' More specifically, the source of about $600 billion
net new cash necessary to lift the market's overall capitalization by $6
trillion last year could not be identified.'
Biderman continues, 'We
know that the U.S. government has spent hundreds of billions of dollars to
support the auto industry, the housing market and the banks and brokers. Why
not support the stock market as well? The money did not come from traditional
players.
One way to manipulate the
stock market would be for the Fed or the Treasury to buy a nominal $60 to $70
billion of
Obviously the Plunge
Protection Team was the culprit behind this entire rally. The ETF
Profit Strategy Newsletter predicted the onset of this rally previously on
March 2nd based on a composite of common sense indicators.
How long can the
market exhale without inhaling?
It is, however, possible
that this rally lasted beyond its normal expiration date with some friendly
help from Washington. What's next?
Nobody knows for sure. But
when the present throws you a curve ball, it is often helpful to look at the
past for guidance.
The April issue of the ETF Profit Strategy Newsletter compares the
current constellation (which could well be a double top) with the double tops
of 2000 and 2007. It also takes a look at
The Plunge Protection Team
wasn't able to prevent the 2000 and 2008 meltdown, how long will it be able to
keep this market afloat?