The Fed: Still Goosing the Options Market

This is getting old.

As I’ve noted in previous essays, monthly options expiration usually results in major 1-2 day rallies as traders push the market higher to close their options positions in the black. Typically, the largest pre-expiration moves occur the day before expiration, but in general the week of options expiration has become a week for outright manipulation in the markets.

As if this wasn’t bad enough, we have a Fed Chairman who actively participates in the manipulation. Indeed, Ben Bernanke has juiced the financial system virtually every options week since July.

Back in July, he pumped $80 billion into the system, expanding the Fed’s balance sheet by buying mortgage-backed securities (and reversing a 4-week decline in stocks). This sounds technical, so simply think of it this way: Bernanke bought a bunch of garbage assets from the banks at extremely inflated prices, essentially handing out $80 billion in cold cash while taking a load of junk off the banks’ balance sheets.

Let that sink in for a moment.

We have a Fed Chairman (the guy in charge of our monetary system) who is happy to help Wall Street game ordinary investors by pushing the market higher during options expiration. Put another way, Bernanke is helping Wall Street manipulate the market to make more money off of ordinary investors.

It’s the ultimate garage sale: a transaction in which assets of questionable value are bought for prices far exceeding their market price. And Bernanke has done it virtually every month on options week, throwing gas on the fire of an already manipulated market.

Last week, he put $54 billion into the system. You can see the results in the chart below:

As you can see, stocks positively exploded last week, rising 3% from Tuesday to Thursday. This pulled the S&P 500 back into its rising bearish wedge pattern: a pattern that occurs when the trading range shrinks as stocks rise higher.

The rising bearish wedge pattern is extremely important to note because these patterns typically preceded sharp moves downward.

However, in the intermediate term the upward momentum (and Bubble Ben’s juicing) is likely to push stocks to a level none of us thought possible. Indeed, the above bearish rising wedge sets a potential target of 1,300 for the S&P 500. And who thought we’d see stocks there only one year after the worst financial crisis in 80+ years?

This will end badly (as all bubbles do), but in the near-term be prepared for additional upward moves in stocks. The big opportunity will come when the bubble finally goes “pop.”

And it’s not too far off.

Comments

[Dave Wrixon:]

Yes, but remember Wall Street's wealth and status along with much of America was built on credibility. So where does that leave everyone?

Oct 19 11:00 AM

[GMak:]

It will be very interesting to see how the FAS 166 and 167 unwind the toxic assets hiding inside the special vehicles among banks in 2010. But banks will probably do anything and everything to stop those rules from coming into reality. Those unhedged positions in derivatives with the Big Banks may just be transferred to the Fed (us) in many creative forms eventually...

Oct 19 12:28 PM

[bigbear4511:]

This stock market is like a crack addict. Please, please can i have some more earnings pleaassssssssssssssse. (Alcoa post .03 cents earnings) oh thank thank you my presious earnings Snifffffffffffffffffff... ahhhhhhhhhhhhhhhh ....Dow tops 10,000 all time high after economic collapse.

Oct 19 03:59 PM

[Tim Shaw:]

What's preventing the Fed from running this game for another year or longer and take S&P up to 1500.00.

Oct 20 03:41 PM

[Dan in mpls:]

I'm betting that the fed half rightly feels the need to save the big banks at any cost. I just wish they had broken each of them into 3 banks instead of merging the weakest with the biggest making it tougher to let that one fail. But this musing is of little consequence. Big money talks and it is screaming now. How long and whether the Fed can control the market is the trillion dollar question. I can't imagine that even the big money could want the S and P much higher as the higher it goes the less control they will have over it. Then there is the issue of greed. Will big money stay on the same game page forever? I just know that when it ends we all want to be the first one out the door.

Oct 23 06:25 AM