ETFs Are Too Powerful

Are ETFs forcing stocks down at times? Scott Rothbort had a fantastic article yesterday afternoon on the role of ETFs and whether they can really affect the market.

I think it is somewhat persuasive, but it does not answer the question that someone can use these instruments, particularly the Bear Ultra Funds, to manipulate the close of the market given that there are market on close orders that must be placed at 3:40 because of the nature of the project. If you come in with guns blazing, you are directly going around the margin rules to be able to blast out stocks to accentuate the direction of the market. You get 3-to-1 leverage on top of the 50% leverage you can use, allowing for some serious firepower to take the market down. I understand the notion that the "solution" these funds use is to employ swaps, but as always, the swaps are simply the stocks all over again in a different form, one that the stock market by the way simply can't handle owing to the velocity of the moves.

Put simply, I regard these products as a derivative of portfolio insurance, a direct cause of the 1987 crash, because the market could not handle what was then known as dynamic hedging. That's the same as these ETFs -- weapons of mass destruction that retail investors and institutional investors can use both as a hedge and as a way to take the market down after putting on massive shorts all day.

If you combine these with a targeted approach that can move Exxon (XOM - commentary - Cramer's Take), one of the biggest players, and Chevron (CVX - commentary - Cramer's Take), another important portion of the index, through shorts and puts and the oil ETF, you can push the market down even faster, as Rothbort admits that the sector ETFs have big impact.

I am simply saying that if I wanted to do so, I am confident that with little cash I could collapse the market using these triple pro-bear products in conjunction with other ETFs to take this market apart at 3 p.m., with the real damage coming after the adviser to the fund puts in the market on close orders that can then be run ahead of, causing additional chaos.

It's just too easy. The instruments should not have been approved. They are too powerful with too much leverage at a time when we are trying to eliminate the leverage. Of course, you could argue that you could blast things out with S&P futures themselves, but these pro-bear instruments have tremendous firepower and can lead to these amazing closes that we have seen.

At the time of publication, Cramer was long Chevron.

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Know what you own: Cramer mentions bearish ultra funds. Examples of these ETFs include UltraShort QQQ (QID - commentary - Cramer's Take), UltraShort Dow30 (DXD - commentary - Cramer's Take), UltraShort S&P500 (SDS - commentary - Cramer's Take), UltraShort MidCap400 (MZZ - commentary - Cramer's Take), and UltraShort Russell2000 (TWM - commentary - Cramer's Take).

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