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Small investors are piling into the stock market with an enthusiasm we haven't seen in years. That's never a good sign. Meanwhile, many financial experts with their charts and graphs say there is no doubt - none whatsoever - that we're heading toward a "correction" that will be a big one.  But of course we have plenty of other experts with their own charts and graphs saying the stock market is still a good bet.

Remind me why anyone trusts financial experts?

What you need is a cartoonist to tell you how to invest. My prediction is that there will be a correction of 20% or more sometime in 2013. That will be followed by a jerky climb for the next several months back to wherever the stock was before the fall.

My prediction is based on the observation that the stock market appears to move as if it is manipulated by a network of big players. They lure in the excitable small investors by allowing the market to show a year or two of solid gains then they sell their shares, spook the world with predictions of doom, and buy back into the market at the lower prices.

The way the big players cover their collusion is by synchronizing their sudden exit from the market with bad financial news. And if there isn't any naturally-occurring bad news, they create a phony story of certain doom that sounds plausible. The financial news outlets depend on finding "reasons" for moves in the market, so they are more than happy to report that the phony crisis is the cause. And once a "reason" takes hold in the public consciousness, all of the lesser-important pundits chime in to support that explanation.

When I say there is manipulation and collusion in the financial markets, it doesn't mean there are actual meetings in which billionaires smoke cigars, drink expensive cognac, and make their evil plans. It might be enough that they are all so aware of each other's moves that they just play follow-the-leader and do so faster than small investors. The sort of market manipulation I'm describing only requires one billionaire leader who is closely watched by the other billionaires. When he sells, they sell, and they all understand why.  The big players who time it right get a 40% gain for the year while the underlying value of their stocks is unchanged at the end of it all. It is the perfect crime.

Does any of that sound plausible to you? Or do you believe the markets are mostly honest, give or take a few high profile cases of insider trading?

Normally I wouldn't buy into a conspiracy theory that has no smoking gun type of evidence. But financial markets are a unique situation. When you give people in that industry the motive, the opportunity, and a near-zero chance of getting caught, how can you expect them to play fair? The bigger shock to me would be to learn that the markets are free of manipulation. That would be a violation of everything I know about human nature.

So look for a 20% correction in 2013.

 
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+7 Rank Up Rank Down
Mar 1, 2013
I'm not normally an advocate of back-and-forth on here, but I'm curious as to why Phantom II's post has the thumbs-down. As someone who left the engineering world to become a Financial Advisor more than a decade ago, I'd say he very accurately describes typical individual investor behavior. VERY accurately. It seems that I spend far more time and energy combating that exact proclivity in clients than I do on analysis. Clients want out when the market is down and don't want to get back in until it's back up.
 
 
+5 Rank Up Rank Down
Mar 1, 2013
This blog post is the sign. SELL SELL SELL
 
 
Mar 1, 2013
I think you're missing the point. There may be market manipulation in the short term, but in the long term, the market's rise or fall is based on the health of businesses. Predicting that the market will rise or fall in a given time period is nothing more than a guess. It's a safe bet to say that the market will fall at some point this year, although another 20% fall is unlikely given current market conditions. But then, I'm just guessing, just as much as you are.

When you talk of the 'market,' you're talking about, in most cases, one of the major indices of the US stock market: the Dow-Jones Industrial Average (DJIA) or the Standard and Poor's 500 (S&P 500). S&P 500, as it says, is an index made up of 500 companies, while the DJIA is an index made up of 30 large corporations. If someone were going to manipulate the 'market,' then, they'd have to manipulate the stock prices of either 30 or 500 companies. Not a reasonable thing to assume is being done. But you can believe anything you like, Scott.

You mention that a lot of small investors are investing in the stock market. That may be true, but you don't go into the reasons for that. Part of it is because many people invest based on fear rather than logic. When the stock market is down, they sell, fearing further losses. Then when the stock market begins to recover, they wait until it gets back to where it was before they go back in.

Right now, the market is nearing an all-time high. So the fear-based investor says, "Hey, it's doing great! Time for me to get back in!" Not realizing that they've already passed the gains they could have been getting if they'd just stayed in.

To make this simpler to understand, let's take a simple example. Investor 'A' invests $100 in the market when the DJIA is at 12,000. The market then drops 20%, to 9,600. His $100 is now worth $80. Fearing more losses, he sells and goes to cash. He now has $80. The market then goes to 9,000. He says, "Whew! I'm so glad I sold! I saved myself from having another $3.20 in losses! I'm such a smart investor!"

The market then starts to recover. It crosses the 9,600 point threshold. He holds off, fearing that it's temporary. It goes to 10,000. He still holds off. It goes to 11,000, and then back down to 10,500. He says, "Wow, it's too volatile. I can't get back in yet!" Then it climbs to 11,000, and then to 11,500. He finally says, "It's going good now! Time to get back in!"

So he takes his $80 and reinvests it in the market. It then goes back to the 12,000 it was when he first entered the market. "Wow!" he thinks. "I'm a great investor! I got back in at 11,500, so I made $3.50!!! What a great market strategy I have!!"

So now he has $83.50. If he had stayed in the market through all this, he'd still have $100, more or less. His 'brilliant' strategy has put him in the position that, to break even, the DJIA now has to go to 14,375.

That's one reason why small investors are going back into the market. Here's two others: in times of uncertainty, a lot of people go to cash, which basically mean they go to bonds. Bond values are inversely proportional to interest rates. In other words, since interest rates are really low now and are almost certain to go up (there's a better prediction than Scott's), bonds, especially long-term ones, are a crappy investment right now. People are realizing this and are getting out of bonds. Where are they going to put their money?

Well, and here's part two, not into real estate. Even though that's probably a great investment right now. But the fear-based investor only remembers the housing bubble. They are afraid to invest in anything that has dropped in value. So they go back into stocks, which are nearing an all-time high. Too late, folks.

So what should a smart investor do? Should he go into gold? How about playing the futures market? Go to Las Vegas and put his life savings on 'red?'

Well, he shouldn't take advice from a cartoonist. Or from me. What he should do is find an independent, fee-based financial advisor who will determine his long-term goals and risk tolerance, and develop a diversified portfolio that includes stocks (generally ETFs), bonds (generally short-term), real estate, overseas investments, and so on. Then, he should allow his advisor to rebalance his portfolio as necessary, and reevaluate based on a change in the investor's situation or needs.

Ta da! Sounds simple, doesn't it? If you're not an expert at something, particularly something in which your emotions are going to work against you, then go to a professional. The doctor who treats himself, it has been said, has a fool for a patient. Think how much more foolish a person would be to treat himself if he ISN'T a doctor. Yet that's what people do with their financial future. You'd be better off taking financial advice from a cartoonist.

But not much better off.
 
 
+6 Rank Up Rank Down
Mar 1, 2013
"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed." ~ Benjamin Graham

I agree the markets seem to act as you describe, but I don't buy even the non-communicative, understood, collusion thing a bit. Markets swing because of "irrational exuberance" and irrational fear (how many times did you hear the words "great depression" in 2009 when the Dow hit 6500?). So, wise investors do as Warren Buffett describes: "be fearful when others are greedy and greedy when others are fearful."

The difficult [impossible] part is knowing when to jump in and out. Can you name a rich and famous market timer? --someone who consistently jumps in and out profitably? The Warren Buffett's and Peter Lynch's of the world are long-term, buy-and-hold investors based on fundamentals. The swings are exacerbated by investors letting their emotions (fear and greed) get in the way of discipline.
 
 
+4 Rank Up Rank Down
Mar 1, 2013
So, your idea is, the players first agree to sell quietly billions of shares and then push prices down by spreading alarm and despondency.

Doesn't sound very convincing because the risk of people getting a whiff of it rises with the number of shares.
Each player would have an incentive to sell quietly even sooner, and to the other biggies because this would mean less trades.
Therefore self interest would bust this kind of coordinated effort.

Also there's something more: Today, 90% or more of the trades are done by professionals, i.e. fund managers, investment companies and the like. Milking the few private traders like you imagine simply isn't worth the effort and the big pros won't fall for it.
 
 
Mar 1, 2013
70% of all trades are performed by computers on microsecond time scales.
 
 
Mar 1, 2013
I suspect it's kind of a non-conspiracy de facto collusion, in which everybody working towards their own interests and with high awareness of how the system works ends up acting more or less exactly like they would if they really were getting together in smoke filled rooms making sinister plans.

I feel bad for my IRA now, though. Sometimes I wonder if the old fashioned mattress method is better.
 
 
Mar 1, 2013
Well, there may well be actual meetings where these evil plans get made.

I don't buy a lot of the Bilderberg conspiracy theories re: them secretly ruling the world and manipulating everything, but the fact remains that those meetings DO take place. Would be easy to collude behind closed doors.
 
 
Mar 1, 2013
I've been thinking about this for some time, and how to take advantage of it. Stipulating that I'm neither smart nor fast enough to completely maximize my investment, I am considering moving all the money in my retirement fund from investment accounts to something safer. I figure I'll beat the big boys out of the market, hten come back in with them and while I won't make top dollar, I won't tread water like everyone else.

Unfortunately, my plan considers the 'safe' investment Government Securities. And the US Government seems like a bad bet today for my retirement account.

You've made me very upset, Scott. Very upset indeed....
 
 
Mar 1, 2013
I'm always reluctant to assign motive to behavior. People think differently from each other, and what might motivate me to take an action is very often not the same thing that motivates others to take that very same action.

So while I don't doubt the follow-the-leader behavior or the potential of a 20% correction, I don't have any reason to believe there is a great collusion, unspoken or otherwise, to manipulate the market as a whole.

It could be that the big investors, who all have similar training and similar experiences, who all spend their time analyzing pretty much the same data as everyone else, and who all have the same information that was received at about the same time, each independently reach the same conclusion and make the same decision as all the other big investors. Of course they won't all reach the very same conclusion, but when the "sell" significantly outweighs the "buy" the market will move. Independent investors, who are not watching as closely and don't have the same training, are more likely to be on the losing side of this equation.

The big investors may understand the impact this has on the market and play along to take their share of the profits, but it doesn't seem to me that they are intentionally making it happen.

This has the same effect as you describe, Scott, but without the nefarious undertones. Of course I have no idea whether my scenario is correct. It just seems, to me, to be more likely than a vast, but silent, conspiracy.
 
 
Mar 1, 2013
There probably is some degree of manipulation, at least on a per-stock level. However, the overall market manipulation is probably less pronounced and more a function of sophistication and experience. If you know what's going to happen and you're quicker to pull the trigger, than you'll get out of positions while the retail investor sits by and waits for improvement. Then after 10-15-20-25% correction, the retail investor capitulates far too late and the sophisticated investors take that as a sign that the market is oversold and buy back in. It's more a function of retail investors' behavior being predictably wrong. The key is to do the opposite of normal psychology. Buy when things look bleak and sell when they look positive. It takes a series of getting kicked in the plums until you start to do the opposite of what your lizard brain is telling you to do.
 
 
Mar 1, 2013
I think you have to distinguish between manipulation and exploitation.

The market is simply too large, with too many dispersed players for any group of "bigwigs" to be able to manipulate its direction in any significant way. However, I would agree that they are set up to somewhat unfairly exploit the markets moves via front-running (trading ahead of their clients), high frequency trading, etc.

Given that large trading firms all seem to pull their employees out of the same 5 or 7 schools, the market is subject to a lot of group think, and thus a high profile player with a plausible sounding thesis can sometimes get the rest of the fish to follow along. (think George Soros in 2008). CNBC and the financial press simply amplify this effect. However, this can hurt the big players as much as help them (i.e. Bear, Lehman), so if they are master manipulators, they must be pretty bad at it.
 
 
+11 Rank Up Rank Down
Mar 1, 2013
[Remind me why anyone trusts financial experts?]

Lets see....take your pick...

A) People are social creatures and have an inclination to follow whoever they perceive as occupying the superior position.
B) People want to make smart choices without putting in the necessary work.
C) A lot of people havent thought this through like you have.
D) Theres a sucker born every minute.
 
 
Mar 1, 2013
The majority of manipulation is with technology... High Frequency Trading / Flash Trading. As long as these techniques continue the markets remain in a very unstable state and easily manipulated.
 
 
Mar 1, 2013
[When I say there is manipulation and collusion in the financial markets, it doesn't mean there are actual meetings in which billionaires smoke cigars, drink expensive cognac, and make their evil plans. It might be enough that they are all so aware of each other's moves that they just play follow-the-leader and do so faster than small investors. The sort of market manipulation I'm describing only requires one billionaire leader who is closely watched by the other billionaires. When he sells, they sell, and they all understand why.]

I cant give you links because I dont remember where they are, but Ive seen articles saying that this sort of thing, more or less legally, does indeed happen. I remember particularly an article saying that many investment managers watched what some very large pension fund did in making their decisions.
 
 
 
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