Is the Stock Market Rigged?
Today, when Standard & Poor's changed their ratings outlook on U.S. Treasury bonds from "stable" to "negative", they also announced that they would consider a downgrade in the U.S. government's credit rating within the next two years. This, as one would expect, sparked a sell-off in the stock market. All three market indexes were down by over 1% by the end of the trading session on April 18, 2011. (1)
The agency made it's announcement soon after the markets opened, and shortly thereafter the DOW dropped closed to 2%. But then a curious, though somewhat familiar, pattern emerged. Despite the sell-off, with the Dow Jones Industrial Averages down over 200 points, the market indexes showed some buying pressure later in the day. By the end of the session, the buying pressure was enough to recoup a significant portion of the earlier losses. If history is our guide, we will likely see 100% of the losses in the DOW recouped by tomorrow afternoon.
Is it Rigged?
Since the stock market turn-around in March 2009, speculation about the stock market being rigged has been rampant. Credible investors and market watchers began accusing the Treasury and the Federal Reserve of rigging the market. And Sprott Asset Management, an investment management company, accused the government of running a Ponzi scheme in 2009.
The most credible accusation so far has come from Charles Biderman of TrimTabs Investment Research. (2) Mr. Biderman published a report in 2009 showing that money was flowing out of the equities markets at an astounding rate. He also noted how rapidly the stock market rallied. Mr. Biderman speculated that the Federal Reserve had started to buy S&P 500 futures contracts, which drove up the index and hence the market.
Mr. Biderman noted that he had no evidence that the Federal Reserve was actually purchasing stock futures. However, he stuck by his claim and relied on the data showing massive outflows among all traditional investor categories, from retail investors to foreign firms. Mr. Biderman has reiterated his claim since publishing the initial report.
The market action after the S&P ratings announcement has market watchers wondering if Mr. Biderman was correct. Obviously, the government has a vested interest in maintaining the appearance of an economic recovery. Does this extend to rigging the stock market?
Mainstream market watchers answer in the negative, pointing to previous post-crash rallies. However, the analyst John Williams of Shadow Government Statistics (3) points out the Greenspan Fed was rumored to have purchased stock futures to encourage the rally. Hard evidence is scarce, but analysis of prior rallies definitely points to something strange happening. And if true, we can expect the confidence of investors to be shaken to the core, severely undermining the chance of any economic recovery.
References
(1) http://www.marketwatch.com/Story/story/print?guid=7F633610-69BD-11E0-8CAB-00212804637C
(2) http://www.marketwatch.com/story/fund-flows-firm-suggests-government-bought-stocks-2010-01-05
(3) http://www.shadowstats.com/article/economic-and-systemic-crises
