Wednesday, May 18, 2011

Making Money at the Margins and Why the Rigged Game Doesn't Matter

OK, all you wise guys who think they know how the markets work and how to make money in them. If you've been paying attention the past few weeks and months, you may have noticed some kinds of patterns that have developed, both in individual stocks and in the general indices.

One such pattern is playing out right now, and, of course, as all things on Wall Street are now played out in factors of milliseconds, this one and its tangential cousin, is pretty obvious.

First, let's look at the overall picture and then we'll jump into the tangent by-product of what is essentially a swing trade that takes place over the span of a few weeks, but can be played by the day, hour, or, if you have ultra-fast connections, the millisecond.

It's all about movement and that herky-jerky, up-down action that's become so common over the past ten years or so. Taking a look at the movement of the Dow Jones Industrials over the past two weeks (actually, 13 trading sessions, or the month of May, to date), we find the following:


So, we see stocks go up, stocks go down, but, by the end of the day, the RANGE, from the highs to the lows, are amplified double, triple or many more times the amount of gain.

Why is this significant? Because, if you know which way the market is going, minute-to-minute, day-to-day, obviously, you can make a fortune. And you know those sharpies at Goldman Sachs, Merrill Lynch (owned by Bank of America), Morgan Stanley and JP Morgan have all been boasting some awesome profits on their trades. Most of them will go entire quarters without having more than one or two losing days.

How do they do it, and why can't you and I? Because, they pretty much are the market. Their volume of trades is probably 75% or more of the total volume trading. They can move individual stocks any way they like, whole indices if they work in collusion. Funny word, that collusion. In its barest form, it is defined as: Secret or illegal cooperation or conspiracy, esp. in order to cheat or deceive others. Oh, yeah, and it's very, very illegal.

Now, I'm not saying that these big Wall Street firms are engaging in anything illegal. After all, the government just bailed them out with billions of dollars of taxpayer dollars a few years ago and the Fed keeps shuffling them money nearly every day via their POMOs. So, why would they need to cheat?

Well, nobody has to cheat, but it sure makes the game a heck of a lot easier if you do. And, judging by what these very same firms did when they were hurling mortgage-backed securities and credit default swaps around, they've shown a propensity for, uh, cutting corners and shading the truth, all to their advantage.

By determining the direction of the market due to the size of their cumulative trades, they almost have to make money every day, every minute, every, yes, millisecond. They are the best at their craft, no doubt about that, and they can shave every last dollar off an individual investor's hide. No doubt, they are not very concerned with the success or failure of anybody but themselves and their largest clients, who are likely clued into the game and whose money they use to goose or deflate stocks and whole markets.

Face it, with four or five big firms handling most of the daily volume, does anybody else really stand a chance? And just how reliable are these stocks which are jumping around in inconceivable patterns on a fundamental basis?

It makes one question the validity and freedom of our markets, something which I've called into question many times here. To be perfectly honest, I've often considered giving up this daily blog, because, when one gets right down to the nitty-gritty details, there's no technical analysis needed, no market savvy needed. All one really has to do is go with the flow, day-by-day, every day, to make money, but that assumes you know which way the flow is going. It would be a full time job, though there's no guarantee that even the smartest, most skilled day-traders, armed with the best data and fastest computers, would come out ahead, only because the big boys on the inside would be skimming at the margins all along.

There's little doubt that the traders on the street, employed by the major firms, have a massive advantage, and it's probably much the same way in commodity markets, forex markets and any other market in which they have established a presence. While the markets may be kind to those at the top, the risk level is quite high for everyone else, and that's why I just write about it. I haven't made a single trade in almost two years, and even then I was playing very lightly.

So, what to do?

Honestly, I don't know. I've advocated silver and gold for the past few years, but we've seen recently what can happen there, especially in the case of silver, which took a 30% haircut in just about two weeks time, proving no market is safe from the ravages of the Wall Street gang.

That covers the general trend here. No about that tangential trade. Referring to the chart above again, notice today's action: an 80 point gain and a mere 128 point range. Today's trading was almost all one-way, and I'll wager that tomorrow will be more of the same, and maybe even Friday, too. Why? Take a look at the calendar. Options expiration is Friday and there's plenty of money out there looking to cash in on the upside.

For all the ups and downs over the past 13 sessions, the Dow is only down 250 points, about 2%. By Friday, there's a very good chance it will be less than that, and a whole bunch of traders will be high-fiving each other over their exploits in the options markets.

Hey, it's a lifestyle.

Dow 12,560.18, +80.60 (0.65%)
NASDAQ 2,815.00, +31.79 (1.14%)
S&P 500 1,340.68, +11.70 (0.88%)
NYSE Composite 8,407.48, +74.41 (0.89%)

Things turned dramatically today for now apparent reason. Advancers trounced decliners, 4999-1573. On the NASDAQ, a dead heat. There were an equal number of stocks making new highs and new lows, 52 of each. Over on the NYSE, new highs led new lows, 121-22. Volume was right back in the old toilet, simply because, as stated above, there aren't that many players.

NASDAQ Volume 1,893,562,500
NYSE Volume 3,871,767,500

Crude oil was up sharply, gaining $3.19, to $100.10 on reports of a drawdown in supply and raging fires in Alberta, Canada, home to major oil operations. While Canada is our largest supplier of oil (no, honey, not those nasty A-Rabs), the amount of crude affected is a small fraction of the daily import total, but that doesn't matter to the market manipulators, apparently. Anything to goose the price at the pump a little higher, they'll use it, whether it makes sense or not.

Gold managed a gain of $9.90, hitting the $1496.90 mark, while silver rocketed higher by $1.11, to $35.02. Word has been circulating that the major shorters of silver have cut back their activity to a level not seen since last fall. That should be a signal to most silver players that it's safe to wade back into the market, as the price manipulators have covered their out-of-line bets and gone to play elsewhere.

What else can one conclude from the wild swings and unusual weather but that ours is a very strange and still quite untamed world.

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