Can Central Banks Change the Stock Market’s Primary Trend?

By the Curmudgeon with Victor Sperandeo



According to Dow Theory, neither a central bank nor any other entity can manipulate the stock market such as to change the Primary Trend.  The Primary trend usually lasts more than one year and may last for several years. If the market is making successive higher-highs and higher-lows the primary trend is up. If the market is making successive lower-highs and lower-lows, the primary trend is down.  [There are also Secondary trends, and Minor trends, but they are not the subject of this article.]

However, we currently are in the longest bull market in history which will be 11 years old this March.  During that time the Primary trend has been up, despite three corrections that mysteriously ended (October 4, 2011 intra-day, February 11, 2016, and December 24, 2018).

Could such a long uptrend in stock prices have happened without the Fed and other global central banks manipulating the market?

Dow Theory - No One Can Manipulate the Primary Trend:

In his iconic Dow Theory Letters, the late Richard Russell unequivocally stated that the Fed could not change the market’s Primary trend.  A tenant of Dow Theory is that stock market manipulation is possible day-to-day but the Primary trend cannot be manipulated.  That hypothesis was largely based on Robert Rhea’s interpretation of Dow Theory (Russell was so enamored with him that he once wrote he was “the reincarnation of Robert Rhea”). 

The following text on stock market manipulation was taken directly from Robert Rhea’s book, The Dow Theory:

Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence on a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.  Hamilton wrote:

'A limited number of stocks may be manipulated at one time and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)

'Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)

'…the market itself is bigger than all the 'pools' and 'insiders' put together.' (May 8, 1922)

'One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. …no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.' (April 27, 1923)

'It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or 'manipulating' the market for a short period. The professional speculator is always ready to help the movement along by 'placing his line' while the little fellow timidly 'lays out' a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the 'technical situation' so dear to the hearts of financial news reporters.'

'Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89 billion. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!'


Opinion: Fed produced Stock Market Bubble will end BADLY:

John Hussman, PhD and x-Stanford Finance Professor who runs several mutual funds, has long said that the Fed has created a huge stock market bubble. In December 2018 he wrote:

In the Federal Reserve’s attempt to bring the U.S. out of the crisis of its own making, the Fed has produced conditions that make another collapse inevitable. Unfortunately, the scale of the present bubble is far grander, and the consequences are likely to be more severe. By the completion of this cycle, I continue to expect the S&P 500 to lose roughly two-thirds of the market capitalization it reached at its September 20 peak. Mountains of covenant-lite debt and leveraged loans, this cycle’s version of “sub-prime” mortgages, will go into default. Worse, “covenant-lite” means that lenders have much less protection in the event of defaults, so recovery rates will plunge to levels that investors have never experienced.

On January 3, 2019 Hussman tweeted this ominous warning:

Yesterday, U.S. stock & bond market valuations pushed to extremes that now imply total returns of just 0.25% on a passive asset mix (60% stocks, 30% bonds, 10% T-bills), for over a decade. The glorious "passive" returns you see in hindsight now rest on an extreme worse than 1929. 


Dow Theory is no more; Central Banks Rule (Victor):

Yes, Central banks have changed the market’s Primary trend.  This has been demonstrated since late 1987 - from the creation of the (former Fed Chair) “Greenspan put” to the Fed’s rescuing the stock market repeatedly over the last 11 years. After Greenspan was “knighted” and called “The Maestro,” every large global Central Bank began using the “printing press” [1] more and more to beyond anything in the historical past to achieve “Greenspan God-like” status.

Curmudgeon Note 1.  The “printing press” in this context refers to the Fed and other global central banks (ECB, Bank of Japan, Bank of England, Swiss National Bank, etc.) buying securities (bonds and stocks) with “money created out of thin air.” No new money is actually printed as the transactions are done electronically.

When the Fed uses open market operations or quantitative easing (QE) to purchase U.S. treasuries and/or mortgage securities from banks or private bond dealers, people call this “printing money,” but the Fed is instead creating funds electronically from its infinite credit account to buy the aforementioned securities.  The proceeds are then deposited at Federal Reserve member banks and add to their “bank reserves  Such reserves which are over and above the minimum requirement banks have to hold are called “excess reserves


The Fed propping up the stock market has been done through ultra- easy monetary policy and moral suasion. By controlling inflation, the Fed was able to keep interest rates very low (or zero).  The result was negative real interest rates across the yield curve (even before taxes). That provided investors a huge incentive to go long stocks and led to the TINA mentality: “There Is No Alternative” (to buying stocks when real yields are negative).

The magic of artificially low inflation was primarily accomplished by the Federal Reserve enabling Fed member banks to “not loan money” by paying them interest on excess reserves (see Note 1. above) they held as a result of QE.  Therefore, most of the money created at the Fed stayed there, rather than being used to grow the real economy which would have increased inflation pressures.

Also, the U.S. Bureau of Labor Statistics (BLS) changed the way inflation (i.e. Consumer Price Index or CPI) is calculated so that it is understated and sure to stay low.  Over the years, the methodology used to calculate the CPI has undergone numerous revisions. According to the BLS, the changes removed biases that caused the CPI to overstate the inflation rate.  However, critics view the methodological changes and the switch from a cost of goods index (COGI) to a cost of living index (COLI) as a purposeful manipulation that allows the U.S. government to report a lower CPI.

An example of moral suasion was the July 26th 2012 declaration by Mario Draghi, President of the European Central Bank (ECB) at the time:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

The key to this statement is the implication that the ECB will create an infinite amount of fiat currency and with that paper currency, buy enough bonds to lower interest rates and flood the financial system with liquidity to spur economic growth (instead it artificially inflated stock and bond prices).  And that would be done on an “unlimited basis,” until the goal of keeping the financial system afloat was accomplished.

Meanwhile, the U.S. Federal Reserve has shown over the last 11 years that it can rule financial markets with the “printing press,” ZIRP or negative real interest rates, and fix any domestic economic problem with newly created fiat paper currency.

Therefore, the Fed has been able to control the long-term trend of the financial markets.  That is, until an event occurs (e.g. war) which the Fed can’t control.


Closing Quote:

From Sir Josiah C. Stamp, a director of the Bank of England from 1928-1941:                                                

“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight-of-hand that was ever invented.”

“Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back...Take this great power away from them and all the great fortunes like mine will disappear and they ought to disappear, for then this would be a better and happier world to live in... But, if you want to continue to be a slave of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit.”



Good luck and till next time….

 The Curmudgeon

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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