Tuesday, May 25, 2010

Money At Risk: Dow Plunges 290, Recovers, Gives Investors False Hope

Just like the "flash crash" of May 6, there will be no explanation given for the reversal of fortunes today in stocks. When all of the other major global markets - Japan, China, Hong Kong, Korea, France, Great Britain, Germany, Brazil - were down anywhere from two to four per cent, and US markets initially crash, but then recover to walk away barely bruised, what does that tell you?

That we're special, somehow? That the US is in so much better shape than the rest of the world that if their economies all imploded, ours would receive hardly a scratch? Anyone who buys into such cockeyed logic should have "MORON" stamped upon their forehead.

No, what that tells anybody with any knowledge of how deeply corrupted our stock exchanges have become, is that they are a massively rigged game, and the winners are mostly insiders at banks and brokerages pushing the market in whichever ways delights their fancies and fattens their bottom lines.

Stocks fell to levels below both the 1000-point flash crash and below all preceding 2010 lows. That happened right out of the gate, within 15 minutes of the open. Stock futures had been forewarning a brutal open, with Dow futures down as much as 250 points prior to the bell-ringing. These kinds of gap opens serve only to benefit inside traders, to the detriment of individual investors and fund managers who cannot move massive amounts of stock without really rattling markets.

The average Jane or Joe who doesn't keep an eye peeled on CNBC all day long may only notice the Dow was down 20 points and be happy with that, never knowing that it was lower by 290 just 15 minutes into the session. The S&P 500 actually finished with a fractional gain, after being down by as many as 32 points.

Possibly the most egregious display of manipulation was in the NASDAQ, which was down by as many as 73 points but recovered to finish down only two points.

Did the issues which hammered all other markets simply go away by the time US markets were trading? No. Those issues were belligerent behavior by North Korea toward their neighbors to the South, a slowdown of economic activity and a potential real estate bubble in China and the continuing fiscal woes of the entire continent of Europe, though more specifically, the potential default of the governments of Greece and Spain.

What most casual observers and investors may not realize is that the markets will return to those lows. Whether they do that tomorrow, Thursday, Friday, next week or next month is immaterial. The major indices all fell below their 200-day moving averages last week and continue to mostly reside there. One day's action will not change the fact that new lows were set in place and such lows will almost always be retested. The Dow and S&P were in the throes of a triple bottom breakdown, falling below the lows of February and early May. That kind of violation of support just doesn't go away, stocks have to be handled to erase losses and fresh bottoms.

Call it whatever you like, but today set up a new bottom and one of the more severe head fakes ever seen. Downside risk is still predominant and there's a high likelihood that the final push - after 3:00 - was caused mostly by short covering. US markets should not be considered a safe haven for any investor, simply because they are so obviously rigged. They may move strongly in one direction or the other - or both, like today - without reason.

Dow 10,043.75, -22.82 (0.23%)
NASDAQ 2,210.95, -2.60 (0.12%)
S&P 500 1,074.03, +0.38 (0.04%)
NYSE Composite 6,665.83, -0.91 (0.01%)

Market internals offer much better perspective. Declining issues were dominant over advancers, 4334-2242. New lows maintained their advantage over new highs and actually expanded their edge, 369-88. Volume was heavy, owing to the fact that a lot of stock had to be moved around to erase those early losses.

NYSE Volume 8,458,538,000.00
NASDAQ Volume 2,893,359,500.00

Another indication of what really happened today in markets comes from the commodity pits, where July Crude was down $1.68, to $68.75, a fresh closing contract low. Gold finished up $4.00, to $1,197.80, though silver closed down 22 cents, at $17.76.

The deflation trade is still on, meaning one should be either in cash or equivalents, short, living in another country, or all of the above. Money at risk stays at risk, especially in markets so obviously flawed.

Please pay particular attention to anyone who tells you that 1140 on the S&P is a "bottom." You are advised to run - as quickly as possible - as far away as possible from anyone holding that point of view.

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