What Really Moves the Stock Markets (And How to Take Advantage)

Let's "stir the pot" and challenge both our imaginations and our willingness to look at the stock market in ways that might even make us feel a bit uncomfortable.

What an awesome "Bull Run" we've had since March 9th, 2009. And despite Monday's slight pullback, the stock market of the U.S. is acting like it not only wants to go higher, but is ABSOLUTELY DETERMINED TO GO HIGHER.

So who do you think you are, and who do I think I am, to think the DJIA and S&P 500 can't surprise a lot of people to the upside? I know it sounds like something Harry Dent Jr. might write, but when you understand how the stock markets really work, what drives prices up or down, it is more then plausible to think there's more room for this "bull" to run.

The Wall Street Cheerleading Trio (Jim Cramer, Larry Kudlow and Abby Joseph Cohen) are all doing their utmost to make sure that the average investor's mind is changed, and that instead of mistrust, they engender "full-speed-ahead" confidence that the markets are in "bull-mode" once again.

Last Thursday, during an interview on cable’s popular financial channel, CNBC, Goldman Sachs Group Inc.'s (NYSE:GS) celebrity market strategist, the ever ebullient Ms. Cohen said the S&P 500 Index may rise as high as 1,100 this year, although she warned the move to the top could be rocky.

“We do think that’s achievable, but it doesn’t mean we get there in a straight shot,” Cohen told CNBC. Added Cohen:“Even if this is the new bull market, don’t expect it to look like a ‘V.’ Expect it to look like a series of upward steps.”

According to a forecast put together by the Goldman strategy team, the S&P 500 should trade in a range of 1,050 to 1,100 toward the end of this year. After bouncing back so strongly from its March lows, the S&P 500 is up 12% so far this year.

Cohen told her interviewers:

We do think the new bull market has begun. It may prove that it began in March. Clearly many people were looking for better signs on the economy, and now we’re getting them.

Rebounding corporate profits will be the key catalyst, according to Cohen. She said earnings of $75 a share for the S&P 500 next year are “reasonable” and that the S&P 500 at 1,050 would mean the closely watched index is trading at a Price/Earnings (P/E) ratio of 14.

So from current levels, for the DJIA to hit 10,800 it would "only" have to go up less than 16%, which is about the same percentage the S&P would have to rise in order to reach 1,160. The way the exchange specialists and insiders maneuver the stock exchanges, any experienced trader or investor knows that they won't allow these averages to go straight up.

But the "trend is your friend" in the sense that if "they" want the markets and the market averages to keep going up, "they" will make it happen sooner than later (it will be interested to see what happens when the rest of "them" come back from their summer vacations and August holidays after Labor Day).

The late Richard Ney wrote three books on the nature of the New York Stock Exchange. They are out of print but are a fascinating, illuminating read that opens one's eyes to why stocks and the market go up and down. The more I study his writings the more I experience a "paradigm shift" as to who and what "moves the stock markets".

Ney believed (and remember, this was anywhere from 5 years ago to 45 years ago--Mr. Ney died in 2004) that the exchange specialists, the most powerful bankers (think "The Federal Reserve Bank") and the most influential politicians and legislators all worked together to make sure that the investment markets moved in the direction of their pleasing.

He must have turned over in his grave when the Federal Government under Hank Paulson and the Bush Administration took over Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), followed by their "leveraged buyout" of the largest insurance company in the world, AIG (NYSE:AIG). And now the government owns and directly controls General Motors, and indirectly the entire automobile industry in America (think "Cash-for-Clunkers").

It is now well known that the Federal Reserve and the Treasury "intervenes" in the bond market, the stock markets, and the treasury markets, and that these prominent powerhouses like Hank Paulson, Timothy Geithner, Ben Bernanke and Larry Summers are or were all powerful investment banking representatives.

The mass media seems to have some conflicts of interest as well, since they are all owned, operated and dictated by humongous multi-national, publicly-traded corporations like GE (NYSE:GE), Disney (NYSE:DIS) Viacom (NYSE:VIA)and Newscorp (NYSE:NWS.A).

When Cramer, Kudow, and Ms. Joseph are ready to pump up the markets or scare the bee-geebers out of investors and thus drive the markets down (why isn't anyone asking the reasons that they would be doing that?), CNBC, ABC, CBS, FOX, and NBC provide them the best coverage, the loudest platforms, and the widest press coverage money can buy.

The late Mr. Ney wrote and spoke on this topic for almost 40 years, and most scoffed at him as being "conspiratorial" and "out-to-lunch", but his words ring truer today than they did even 5 years ago when he passed away:

NEWS AND FINANCIAL REPORTING

It is highly unlikely that we will see news reports critical of U.S. stock exchanges, or of the specialist system. There is a simple reason for this. All news organiztions are corporations and do but reflect their management's views. Corporations that own media have specialists influencing the choice of management. Newspapers, magazines, and television are but extensions of the corporate world.

When Richard Ney's first book, The Wall Street Jungle, came out it was on the New York Times best seller list for 11 months. Yet the New York Times would not review it. The Wall Street Journal refused to take an ad from a New York bookstore that featured The Wall Street Jungle.

All three of the major networks were wary of having Ney appear. NBC banned only two people from appearing on the Tonight show with Johnny Carson: Ralph Nader and Richard Ney. Not only do large banks, brokerage firms, and corporations advertise on television, they also are the largest stock holders.

SPECIALIST STRATEGY

The [stock exchange] specialist should be thought of as a merchant with some rather unique inventory problems and opportunities. His goal, always, is to buy at wholesale prices and to sell at retail. This applies to his actions in the course of the trading day as well as a year of trading.

At the bottom of a slide the specialist will buy heavily for his trading, investment, and omnibus accounts. His goal then becomes to raise the price of his stock with his wholesale inventory intact. In practice, though, he may have to sell shares to meet public demand. This will cause him, then, to lower the price to re-accumulate his inventory before he can proceed to higher levels.

A rally begins while the price of the average stock is still falling. "Major rallies begin and end with the unexpected,".

To stimulate public demand for his stock, near the high the specialist will raise the angle of the rising prices dramatically for the stock. True to one of Ney's axioms that prices beget volume, the public will rush into the market place at the rally high. The specialist can now sell his accumulated inventory to fill the increased demand. Heavy Dow 30 volume at the high is evidence of heavy short sales by the specialists, according to Mr. Ney.

When the specialist has sold all his inventory, and has sold short, he will then begin a downward slide of prices so necessary to his plans.

Slides are a mirror of rallies. Near the bottom, the specialist will increase the angle of price decline, alarming investors, scaring them into selling their shares to the specialist who needs them to cover his short sales, and to build a new inventory at wholesale. The media will remain bullish, or cautiously optimistic throughout a slide, until the last two weeks, when they will turn suddenly bearish (just like Jim Cramer did before the big meltdowns of November 2008 and March 2009]. Mr. Ney kept an eye on all this the rest of his life until his passing at age 87.

Why am I pointing this out instead of talking about the "economic fundamentals" or "corporate earnings" or what the Fed is likely to do with interest rates this week? Because those factors are secondary to the interests and prerogatives of "The Smart Money", "The Movers and Shakers of Wall Street and Pennsylvania Avenue" and the "Real Market Insiders".

It is because of how they move the markets and do their ongoing work (which has been going on for over 200 years) that I'm inclined to believe that over the next 2 or 3 months they will jack the prices of stocks up to surprisingly high levels, followed by some blood-curdling down days and sell-offs.

It will permit them to sell high, then sell short, then cover their short sales, and then buy low. Then when they have purchased all that they intend to purchase, they start this process all over again.

What's my point? It isn't to criticize them or to "expose" them. It is to tell myself, my family, my friends and our readers to "wake up and smell the richly-brewed coffee".

Let us not try to out-smart the Smart Money and the Exchange Specialists. Let's yield to the fact that they know what they're doing and that they are very good at doing it.

Why not follow their lead? Why not do what they do and "piggy-back" on their powerful shoulders. Watch the volume, listen to the rhetoric, educate yourself as to how they signal the short-term, medium-term and longer-term direction of stocks, bonds and commodities. Watch how they influence investor psychology.

It isn't easy to do and takes a great deal of research, digging and re-educating of our minds. One place to start is at The Bear Facts Specialist report. Challenge yourself to read every page of this web site and every report. Work hard to prove what you read is either right or wrong, and become a "Savvy Investor".

It also beats reading endless stock reports and listening to the blithering chatter of the "talking heads" on TV. It will actually give you more time to take walks, smell the roses, and enjoy your loved ones.

Disclosure: I do not own any of the stocks mentioned in this article.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Comments

[Ivan Kitov:]

"After bouncing back so strongly from its March lows, the S&P 500 is up 12% so far this year."

I would say ~50%, from 667 (March 6, 2009) to 1000.

I also guess that the current rally will stretch into 2010 (likely till May) together with increasing employment and productivity (report due today). S&P 500 should top 1400 on the wave of the growth in real economics. Keep in mind that the current growth will be referenced to that one year ago, i.e. measured relative to the quickly falling 2008 economy. It will give additional attractiveness to the future growth figures.
mechonomic.blogspot.co...

Aug 11 07:21 AM

[tc1:]

Thank you for a provocative and insightful article, Marc.

I think that, in addition to following the major short- to medium-term trends set by Big Smart Money (the "powers that be" to whom you allude in your article), there's a lot to be said for 1) taking a "risk-expendable" portion of one's portfolio and finding promising small- and micro-cap companies in which to invest for growth and value, as well as 2) deploying a "contrarian" approach and picking up shares in good companies that get temporarily hammered by a broad sector sell-off, a somewhat poor earnings report, or a dilutive stock offering. I've seen too many companies hammered down 10% or 40% in a day or over a period of days, who then zoom back up within a few days or weeks or even within just one trading session. If you're willing to put in a fairly substantial amount of $$s, such short term 10-40% gains can add up quite nicely over time.

And all of this profitability can happen "outside the trend du jour" being set by Big Smart Money.

Aug 11 11:05 AM

[captainccs:]

Beware, "They" is back! A conspiracy under every stone. hahaha

If specialists were that powerful they'd own the Vatican by now. But no, they have to go back into their pits work-day in and work-day out. Just a lousy, stressful, 9 to 5 job.

Aug 11 11:11 AM

[smfranke:]

I think Marc was referring to the index price in January, the beginning of the year, not the March lows.



On Aug 11 07:21 AM Ivan Kitov wrote:

> "After bouncing back so strongly from its March lows, the S&P
> 500 is up 12% so far this year."
>
> I would say ~50%, from 667 (March 6, 2009) to 1000.
>
> I also guess that the current rally will stretch into 2010 (likely
> till May) together with increasing employment and productivity (report
> due today). S&P 500 should top 1400 on the wave of the growth
> in real economics. Keep in mind that the current growth will be referenced
> to that one year ago, i.e. measured relative to the quickly falling
> 2008 economy. It will give additional attractiveness to the future
> growth figures.
> mechonomic.blogspot.co...

Aug 11 01:08 PM

[Marc Courtenay:]

Your comments add the extra dimension to every article written. Your points are well taken. Remember though, the "Big Smart Money" doesn't usually invest any time with stocks that don't have a big enough market cap, so if you're following their lead you want to stay with nothing smaller than a mid-cap stock. That is why lately I've been nibbling on companies like NYX, AA, and CHK.


On Aug 11 11:05 AM tc1 wrote:

> Thank you for a provocative and insightful article, Marc.
>
> I think that, in addition to following the major short- to medium-term
> trends set by Big Smart Money (the "powers that be" to whom you allude
> in your article), there's a lot to be said for 1) taking a "risk-expendable"
> portion of one's portfolio and finding promising small- and micro-cap
> companies in which to invest for growth and value, as well as 2)
> deploying a "contrarian" approach and picking up shares in good companies
> that get temporarily hammered by a broad sector sell-off, a somewhat
> poor earnings report, or a dilutive stock offering. I've seen too
> many companies hammered down 10% or 40% in a day or over a period
> of days, who then zoom back up within a few days or weeks or even
> within just one trading session. If you're willing to put in a fairly
> substantial amount of $$s, such short term 10-40% gains can add up
> quite nicely over time.
>
> And all of this profitability can happen "outside the trend du jour"
> being set by Big Smart Money.

Aug 11 01:47 PM