Most Manipulated Markets in History: Dave's Daily

 

Many have been worried about the integrity of markets as third-party insiders (Fed, Treasury, Exchanges, Trading Desks and etc) have manipulated conditions their way. It's nothing new but it seems extreme currently. A series of circumstances exist where third-parties are hiding in plain sight, boldly manipulating markets.

A series of events has taken markets down, some fundamental and others engineered.

An obvious inflationary situation was becoming present most obviously in emerging markets (BRICs). There authorities were looking at inflation data "honestly" versus the phony data ("core" rate) U.S. authorities were selling. Those countries started tightening using a variety of tools to cool things off. That began serious stock selling in those markets.

Next, many large banks have maintained short and naked short silver positions at the COMEX. These banks were losing large amounts and were being squeezed as silver prices went parabolic. Further, with open interest expanding this required the exchange to keep a larger than normal quantity of physical silver inventory to meet delivery demands. As we demonstrated yesterday, the exchange's inventory was reaching a low point. What to do? The pressure from the banks on the exchange must have been enormous to bail them out. By implementing margin increases this works and is typical to control markets not letting leverage get out of hand. But, the exchange implemented a draconian series of increases or 5 in the last 9 trading days. As one said, "This was like shooting the lifeboats." The clear intent was to knock prices much lower and appeared as "piling on" even as prices started to fall. This turned ordinary selling into a panic leading to across the board commodity selling as investors scrambled to meet margin calls.

Wednesday, even as the dollar was still falling precious metals were also falling which was odd. U.S. stocks were sold on Wednesday even though the DJIA was unchanged. This was misleading given broad selling beneath the headline index.

Thursday the ECB did not raise interest rates as was expected and Chairman Trichet was fuzzy about future actions. With the dollar much oversold this led to euro selling and yen buying as so-called "carry trades" were targeted for destruction.

Also on Thursday, with another margin increase for silver and rumors of similar actions for other commodities (gold, crude oil and etc) selling in the commodity sector exploded. Let's remember one thing; the job of the exchange is to maintain "orderly" markets and not cause chaos. Does a roughly 25% silver price drop in 4 trading days qualify as orderly? Hardly. The only conclusion is the exchange achieved chaos from order but for whose benefit? Riddle me that.

The hammer dropped on stocks Thursday with a horrible Jobless Claims report throwing a wrecking ball into estimates causing most stock prices to fall sharply. The only exceptions were in sectors (Consumer & Transportation) benefitting from weaker commodity prices.

It's interesting all this coincides with monthly DeMark readings indicating trend exhaustion, the May Flash Crash Anniversary, the presumed end to QE2 at hand and the "sell in May and go away" maxim. Does that seem a little too pat?

Volume once again spiked on selling as no doubt stops were hit. Breadth per the WSJ was negative.

 

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Continue to U.S. Sector, Stocks & Bond ETFs

Continue to Currency & Commodity Market ETFs

Continue to Overseas Sectors & ETFs

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Continue to Concluding Remarks

All bubbles come to an end but some ends are induced by harsh methods not necessarily in the public's interest but rather a club of insiders. Their interests are never aligned with yours. If you think markets aren't trustworthy any longer, you'd be right to think so. The action this week has been outrageous and plain as day for all to see.

We'll see how far this goes and what bodies float to the surface. This always happens when markets behave like this. As stated yesterday: There Will Be Blood!

For those interested in silver, this will become a juicy story down the road. Friday the exchange will issue open interest data which will provide a clue as to what's going on. Remember, the exchange serves its members interest first with hopes you have short memories. But this exchange in particular continues to have a poor reputation.

Friday is also the important employment report which no doubt is already baked into prices.

Let's see what happens.

Disclaimer: The ETF Digest maintains active ETF trading portfolio and a wide selection of ETFs away from portfolios in an independent listing. Current positions if any are embedded within charts. Our Lazy & Hedged Lazy Portfolios maintain the follow positions: VT, MGV, BND, BSV, VGT, VWO, VNO, IAU, DJCI, DJP, VMBS, VIG, ILF, EWA, IEV, EWC, EWJ, EWG, EWU, BWD, GXG, THD, AFK, BRAQ, CHIQ, TUR, & VNM.

 

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com .

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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