Who Triggered Wednesday’s Market Reversal?


by the Curmudgeon with Victor Sperandeo

 


Introduction:

 

After being down sharply Wednesday morning August 12th the U.S. stock market mounted a strong turn around rally and closed slightly up on the day.  There was no fundamental reason or news item that sparked the market's up move off multi-week lows.

 

Dennis Slothower's Opinion:

 

In his On the Money market commentary on Wednesday evening, Alpine Capital's Dennis Slothower wrote:

 

“..The S&P 500 index also fell sharply on the opening losing 1.5%, falling well below its 200-day moving average early in the morning.  That triggered the plunge protection team (PPT) and by the end of the day, the S&P 500 made a full recovery finishing slightly higher for the day and above its 200-day moving average.”

 

After the Curmudgeon emailed Dennis to ask for evidence that the PPT was at work Wednesday, he replied as follows:

 

“You are not going to see any evidence of the plunge protection team but that doesn’t mean it doesn’t exist. Case in point today. Crude oil prices just broke to a new six year low taking out the March lows, falling today to $42.07 and yet the S&P 500 index is up like it doesn’t matter at all. Someone is holding up this market. Clearly, it is the central bankers.

 

With all due respect, the Fed admits the central bankers are actively involved in the markets to support prices.”

 

We are very sympathetic to Dennis' view, but we still would like to see some proof, rather than just an inference.  We have seen this kind of mysterious “turn on a dime” market action before (especially on Oct 3, 2011).  Among those said to be responsible are:  PPT, the Fed's dealer banks, the Fed itself, overseas central banks, etc.

 

Bloomberg Weighs In; Zero Hedge Agrees:

 

Meanwhile, Bloomberg had a different take, identifying Goldman Sachs as the institutional buyer that turned the market around on Wednesday. 

 

“Who did the buying as U.S. stocks staged the biggest turnaround in three years? The companies that issued them.

 

The Goldman Sachs Group Inc. unit that executes share buybacks for clients had its busiest day since 2011 on Wednesday, according to a note from the firm’s corporate agency desk. Based on the value of equities repurchased, volume handled by the bank set a record. The note was confirmed by spokeswoman Tiffany Galvin.

 

Corporations have emerged as one of the biggest sources of fresh cash in the stock market, eclipsing even mutual funds with more than half a trillion dollars spent last year, according to data compiled by S&P Dow Jones Indices. They swooped in and bought again on Wednesday as the Standard & Poor’s 500 Index flirted with its largest two-day selloff since January.”

 

In a related and supporting blog post on Wednesday's “mystery dip-buyer,“ Zero Hedge wrote: 

 

“Stocks still benefited from the perpetual corporate management bid that’s helped to sustain the equity rally since the flow from that other price insensitive buyer (the Fed) tapered off.

 

Given the above - and given everything we’ve said this year about debt-funded corporate buybacks buoying equities - no one should be surprised that Wednesday’s magical levitation came courtesy of US corporations.”

 

Net Redemptions from U.S. Equity Mutual Funds:

 

For sure, it's not equity mutual funds doing the buying here.  The Investment Company Institute (ICI), reports that in the first six months of 2015, long-term U.S. stock mutual funds had outflows of $53.53 billion.

 

The most recent ICI weekly data for domestic equity funds shows net redemptions for each of the last 5 weeks…as per the following net flows table:


Week End
   $ M

Aug 5           -7,303

July 29         -5,220

July 22         -3,202

July 15       -11,468

July 8           -2,434

 

Note:  Hybrid funds, which can invest in stocks and fixed-income securities, had estimated outflows of $608 million for the week ended Aug 5th, compared to estimated inflows of $275 million in the previous week. In contrast, domestic equity and hybrid mutual funds experienced net inflows in both 2013 and 2014. 

-->What does that tell you about retail investors?

 

Victor's Comments:

 

Wednesday's (8/12/15) rally “out of thin air” was executed by Goldman Sachs, as reported by Bloomberg. It looks like "pure coincidence" or was it? 

 

The President of the NY Fed and Vice-Chairman of the Federal Open Market Committee is William C. Dudley, who worked at Goldman Sachs from 1986-2007.   Might he have been the instigator of Goldman's buying spree on Wednesday morning?

 

I wonder if the press, (which has become a propaganda machine for the U.S. federal government's agenda), would care to ask Janet Yellen if the Fed was a “manipulative duck,” in this case?

 

When the market has not even fallen 5% recently, and hasn't fallen 10% since 10/3/11, why does the Fed feel a need to buy stocks – directly or through investment bank proxies?   Is the Fed so worried that ANY decline in the stock market will cause a depression?

 

Of course, the Fed will not answer that question directly and there is no direct evidence linking Goldman (or Fed dealer banks, global central banks, PPT, etc.) to mysterious stock market buying on sharp dips.

 

If Hillary Clinton was asked that question, she might say "It's just a right wing conspiracy."

 

References: 

·         Market Manipulation Still Ignored by Mainstream Media

·         Ex-Plunge Protection Team Whistleblower: "Governments Control Markets; There Is No Price Discovery Anymore"

·         Plunge protection’ behind market’s sudden recovery

 

The Curmudgeon
ajwdct@sbumail.com

 

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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