With market sentiment banging against all-time lows we should not be surprised to see some rather wild swings taking place. Part of this is due to poor volume and part of it can be explained by computer trading exploiting the fear of those shorting the market. Bears tend to swing for the fences, by this I mean they are not interested in making a few dollars on a trade, but they short a stock with the intention of holding onto it until it burst into flames, and crashes to the ground. Such traders often go into a trade hoping or thinking the top has been put in or little upside remains. Going short in a market exposes a trader to huge losses those entering such trades tend to do so using tight stops. This means those shorting markets tend to paint a target on their back.
|Easier To Hit Than A Sitting Duck!|
Adding to the woes these bears face is the unholy alliance made up of the Federal Reserve, the government, and the too big to fail. These institutions have created an environment that excels in washing timid and weak bears out of their positions. Insider information, computer trading, and the sophisticated use of computing patterns all target their stops. Bears using tight stops on trades make them easier to hit than a sitting duck, and much of the market's rise has been from these stops being targeted and hit.
To say the market is rigged is an understatement. After over 30 years of trading commodities, I will flat out state without any reservations that lies and manipulation run rampant. Over the years we have witnessed the type of market reversals only the big banks supported by the Fed can generate. These are orchestrated with a concerted effort to buy S&P 500 index futures at crucial support points. This has proved more than enough to turn the markets from red to green in the blink of an eye and reinforced the "buy the dip" mantra.
Still the bottom-line is that the higher
market goes and the more true price discovery is ignored, the more vulnerable it becomes to a final major collapse and
sudden downward move from which it will not rapidly recover. I contend we could be in a "realizing market," which means people are beginning to realize the market has only one way to go and that is lower but this does not mean money cannot be made when imbalances occur.
Until this time, the current pullback in markets has been rather orderly. Still, the volatility we have seen has left many investors whipsawed out of their money and the worst is probably yet to come. I see this as an indication we may be closer to the end of this euphoric bull market than many investors think. Those buying into the market when it dips should remember that markets climb a wall of worry but when they crash, it can come fast and furiously.
It would be wise to remember that the terms overbought and oversold are often "overused." While many systems have been designed to track demand, much of what is considered demand can often surface or vanish in the blink of an eye. Whether it comes from panicked bears running for cover or bulls taking profits, any big player can start a big move in one direction or another. Add to this the fact that with many investors using leverage and taking on more risk than they think, margin calls can generate huge pain and force them to liquidate positions they would rather continue to hold.
Markets can take huge swings that defy logic. An excellent example of this type of event is the great oil contango of 2020. The word, contango, is so poorly recognized my computer spell check did not recognize it. In short, at one point investors were being paid to take oil. This situation occurred as supply overran demand because the raging Corona pandemic was inflicting massive economic repercussions on restaurants, hotels, retailers, automobile producers, and airlines as it brought businesses to a halt.
There is always a group of traders that fall into a category akin to flippers, these people often think they are smarter than you, whether they are or not is questionable. When things are good, they can be very good, when things are bad, they can be very bad. The media and financial companies pushing the economy forward are well entrenched in the art of doublespeak and finding a silver lining in every cloud and it is upon these clouds such traders ride. These self-promoting market cheerleaders love to use the terms overbought and oversold as justification for any market move.
In truth, in a realizing market if we look closely we generally find markets are not overbought or oversold but attempting to reach true price discovery. In such instances, strong capitulation is avoided and replaced with those on the wrong side of a trade simply continuing to deny anything has changed until all their money is gone. Sadly, this can occur faster than most investors realize. With all the financial Ponzi schemes that make up and influence our markets, such as stock buybacks, a very long fall is possible before we reach true price discovery.
While those in power, the politicians, central bankers, and those on Wall Street appear to have painted themselves into a corner more than once, it seems they have superpowers that allow the constant creation of new exits. Do not be surprised if they have a few more tricks up their sleeve. Until now printing more money has driven this market, an explosion in carry trades, and the growing number of stock buybacks. Please note, a lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. In this distorted market, we may find the floor is very weak or only an illusion.