We have been expecting a major correction for quite some time now. In preparation for a market correction the index starts growing more slowly and then finally starts falling. Our NYSE Rate of Change (ROC) chart showed a slowing growth level and then generated a sell signal back in the first quarter of 2014. But the FED continued with its quantitative easing and all that money has to go somewhere, so it has been propping up the stock and bond markets.
So what better time for a correction than when the FED shuts off the money spigot? And to make matters worse the money flow stopped just before the scary month of October when everyone “knows” corrections tend to occur in October. What were they thinking?
Right on schedule as October begins, the market tanks 10% and it begins to look bad for the market. This could be a game changer and really mess up the election next month but don’t worry the FED and those in power have a few more tricks up their sleeve.
In the following chart of the Dow Jones Industrial Average we can see that the index plunges below the 200 day moving average and then promptly bounces back above. The 200 day moving average is considered by many to be a critical inflection point indicating the overall trend of the market. So going below that critical line should have triggered a lot of program selling and caused the market to tank even further. But that isn’t what happened.
Source: Yahoo Finance (Click for Larger Image)
As the Dow broke through to the downside, it tested the line and then fell back down once again, before skyrocketing back very close to previous highs. Now the Dow is only 30 stocks and so it would be relatively easy to manipulate if you had the deep pockets of the government.
So lets look at what happened in the entire New York Stock Exchange.
Source: Yahoo Finance (Click for Larger Image)
This is once again a 200 day moving average but the index appears to be further below the average and in fact at this point hasn’t rebounded above the average. Does this mean that the market has been manipulated? No, but it does indicate that the DJIA is much stronger than the overall market. Which isn’t really any surprise since it is pretty much composed of the cream of the crop and if a stock starts performing too badly it is removed from the index and replaced with a better one.
The NYSE still faces resistance at the August 7th low of 10,557.61
The Plunge Protection Team
The plunge protection team (PPT) was created by Ronald Reagan after the October 1987 meltdown, because certain triggers like the 200 day moving average can result in massive program selling. And so rather than close the markets, they can quietly start buying futures and options that place a floor under the market and blunt the impact of the short sellers. The official name is “the President’s Working Group on Financial Markets”.
So who is on the plunge protection team? None other than the Chairman of the FED, the Secretary of the Treasury, the Secretary of the SEC and the Secretary of the Futures Trading Commission (FTC). Do you think these four people might have a vested interest in preventing a market crash? Especially if that crash was created by the FED turning off the money spigot? Could they have been ready and waiting to pull the trigger? Might they have even informed their buddies at the big banks of their plan (which would provide them even more ammo at the key point and made some people a lot of money on the rebound)?
But even if they didn’t get advance warning the professional traders would have spotted the buying activity and jumped on the bandwagon to ride the FED’s coat-tails… giving new meaning to the old saying “Don’t fight the FED”.
According to John Crudele of the New York Post. “Someone tried to rescue the market last Wednesday… And it’s becoming a regular occurrence.”
Here’s what Crudele had to say, “Here’s the bottom line: Someone tried to rescue the market last Wednesday. And it’s becoming a regular occurrence. The details of last Wednesday morning are these: At the same time the Dow was off 350 points, the S&P index was down 43.80 points, That was an enormous decline in just 11 minutes of trading and it was an indication that Wall Street was not having a good day. [editor’s note: that is an understatement, meltdown is a better phrase] Then, someone (or something) started buying S&P futures contracts en masse. Twenty-one minutes later, the S&P index had regained 30 of those lost points and was back at 1,861.”
The plunge protection team is the brainchild of a former member of the Federal Reserve’s Board of Governors named Robert Heller. He said, “It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares… Instead, the Fed could buy the broad market composites in the futures market.” You can read Crudele’s full article here.
The last time I wrote about the PPT was way back in March of 2005… if you’d like to read more about the Plunge Protection Team.
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