May 8, 2010
What caused the market to drop?
I specialize in trading the ETF (exchange traded fund) DIG.
To learn about DIG go to: http://www.proshares.com/funds/dig_index.html
I have extensive experience in trading (45,000 trades last year alone).
I have learned valuable lessons from trading and I want to pass some of that knowledge to you, so that you can tell those who are in position to correct the inequities of the stock market. The present system allows those who control the market to siphon wealth from the public (the common investors). Here is how:
I cannot go into details in this Email, but I can explain some of the factors, which drive the prices of stocks. (By the way, I recommend watching the following video of Jim Cramer . http://www.youtube.com/watch?v=gMShFx5rThI It is educational)
In the past one year a major factor which has caused the market to move is the DIG. If you want to verify the veracity of this statement, do the following study. Get a hold of "one minute" candle charts of DIG and superimpose them over the same time frame candle charts of DIA (Dow Jones) and SPY (Standard and Poor). (The DIA, the SPY, and the QQQQ, comprise or represent, in a way, the American stock market.) Compare the minute to minute price movements of those ETFs, in those charts. Examine as many days as you can, in the past year. You will find that about 75% of the time, all three ETFs (DIG, DIA and SPY) trade in tandem. When one goes up, the other two go up, almost instantly in the same minute. And, when one goes down the other two go down, almost instantly, in the same minute. If you watch them while they are trading, you will better observe their parallel movement. Keep in mind that the DIG moves twice as much (percentagewise) than the other two.
Now, as goes the DIA and SPY so go the vast majority of the stocks. Very few stocks move on the contrary direction. The stocks which move in the opposite direction have news which specifically impact them (such as earning reports). (There is more to the study of this subject. But this is generally the basis.)
Now, the vast majority of people who trade stocks watch the market (the DIA, SPY, and QQQQ) and make trading decisions, accordingly. They are followers. They follow the leaders. Who leads the market?
Which one of the three (DIG, DIA, SPY) is the "Bellwether"? (The tech-stocks, QQQQ, some times move independently: they do not follow the Bellwether.) I have been studying this phenomenon full time, especially in the past year. In my experience, the DIG is the Bellwether. How do I know this? I know it through repeated trials: through personal experience. In many instances my trades have caused the DIG price to move. Usually, my sales cause the DIG to rise and my buys cause the DIG to drop. The size of the trade, often matters. A trade of 5,000 shares makes a distinctively greater impact on price movement than 500 shares. Besides this, I have numerous experiences where selling at the top (a peak) or selling at a bottom has caused a price reversal. The market makers have reasons for changing the direction of the price, in response to my trading. I cannot explain it in this letter. It is a long subject.) In the past one year the DIG has been leading, generally, the movement of the DIA and the SPY. At this time, oil stocks impact the rest of the market. Notice that in the past month there were some good financial news from various major companies, but, amazingly, the stocks of those companies followed the Bellwether. They followed the oil stocks: DIG.
Who controls the DIG? The answer is: primarily the Market Makers of ARCA and NASDAQ and secondarily other market makers, in other exchanges. They control, most of the time, the price. How? They have an obligation they say, to move the DIG twice as much as the bundle of the stocks which the DIG contains. The ProShares (DIG) website reads: Understand that the funds have a daily objective that is they seek a multiple (e.g., 2x, -2x) of the return of an index on a daily basis only. (By the way, DIG contains Exxon Mobil, which is the largest US company and is included in DIA and SPY). The fact that they admit, that they seek a multiple of the return of an index, it shows that they control (most of the time) the price. They admit that the price of DIG is not free to move on its own. They control it.
The various market makers of the DIG (mainly ARCA and Nasdaq) cooperate with each other (I have specific examples of this) like a pack of wolves who are running down a buffalo (the buffalo is the private investors who get involved in trading this ETF. I talk from experience.) And the market makers of the DIA and SPY follow the market makers of DIG (most of the time), because, at this time, they are not sure where to lead the market. (If they truly followed the financial news –earning reports- of the American companies, the market would not have dived in the past three consecutive days.)
The DIG market makers manipulate the market, but they themselves, are manipulatable. As I indicated above, over time and through much trading experience, I have developed techniques which entice the market makers of the DIG to temporarily raise the price and lower the price. This impacts the whole market. Usually, when I sell they raise the price and when I buy they lower the price. Nevertheless, I have been able, in numerous occasions to manipulate the manipulators by feeding their greed. All market makers can be manipulated because of their greed. This is a big subject that I can not explain in this short letter. To resolve the problem of market manipulation, my suggestion is, to prohibit the market makers (and or their employers) from trading on their own behalf the stocks whose trading they facilitate. They have a conflict of interest.
Here is another problem with the stock market. People are told by their investment counselors to buy stocks while the stocks are going up (on the rise) and sell them when they drop below a particular safety point. For example, people are told to set a limit order (set a buy stop order) to buy a stock when it rises to a certain point. They are also advised, after they buy the stock, to set a limit order (a stop loss order) to sell that stock if it drops below a certain point (percentage). (The Investopedia defines a stop loss order as, It's a simple but powerful tool to help you implement your stock-investment strategy. http://www.investopedia.com/articles/stocks/09/use-stop-loss.asp ) This tool is a recipe for failure (which many people experienced in the past week). Here is why.
The market makers see all the stop loss orders in Level Three. Such orders (Level Three) are not visible to the public. Also, the market makers are allowed to trade for themselves or trade for their employer (the company, which bought the trading seat from the exchange, to conduct the trading of a particular stock). So they occasionally drop the price drastically and fill the stop loss orders: thus, they buy low. Then, in the next day or few days later they intentionally raise the price and sell those shares at a high price to those who place buy stop orders. Thus they buy low and sell high other peoples shares. (What a piece of cake.) This system breeds corruption. The market makers are tempted by other peoples money They are like most humans: essentially greedy. There is a saying padlocks keep the honest people honest. The stock market needs padlocks.
Here is another problem with the stock market system. People are allowed to sell other peoples shares. They call this practice shorting. Shorting causes the price of the stock to drop. The true owners of the stock get nervous by the price drop, and so they sell their stock at a loss and get out. This selling causes a precipitous drop. This is why the market is so volatile. Short selling destroys faith in the value of stock. Imagine if you could sell someones home, while that person owns that home and lives in it, and cause the price of his home to drop and cause the homeowner to sell his home and lose money. It does not make sense. Why should stock ownership be different from home ownership?
If you are looking for ways to improve the economy of the United States, look into these inequities.