CONSPIRACY THEORIES! June 25, 2004
Sy Harding
For the year so far, and particularly over the last few weeks, the stock market has been flatter than week-old road kill. The S&P 500 was at 1135 almost five months ago, and it's at 1135 now.
The main reason being bandied about is that the market is in its summer doldrums. That certainly is part of it. The old market rule of 'Sell in May and Go Away', is based on fact, not theory, that the market is seldom good to investors from May to October, last year being a notable exception. But the declines usually come later in the year, as September and October near, while the summer months are merely lethargic, with even some attempts at summer rallies.
But this year's flat market, on very low trading volume, seems to be more than just the summer doldrums. Investors are standing aside to an extraordinary degree. Unlike traders, who seem to have to try to make something happen even when it's not in the cards, investors don't have to be so frantic. With only their long-term performance in mind, they have the luxury (or common sense) of being able to stand aside, doing nothing when that is advisable. And they have more than the usual reasons for doing that this summer.
My own take on it has been that the market is unusually flat because the uncertainties are also unusual. Beyond the normal market issues of the economy, corporate earnings, and stock valuations; international situations are laden with event risk. There is also the growing uncertainty about the election, and what the Fed will do with interest rates. Markets just hate uncertainty. Perhaps we're even lucky that investors are only standing aside, allowing the market to remain flat, rather than engaging in heavy selling that would send the market tumbling.
But, unlike investors, traders get frantic when they can't make a profit from either direction, while periodically getting whipsawed by trying to do so. When the market won't do what traders want it to for long periods, conspiracy theories sometimes pop up. If the market won't do what you want it to, somebody must be to blame. It can't be as simple as it being a wise time to do nothing.
No big surprise then that my office has begun receiving claims that various conspiracies to manipulate the market have been underway. Most claim that conspiracies are preventing a market tumble. One received this week was different, an explanation of the conspiracy that has purportedly been underway since last year to keep the stock market in a flat trading range. Supposedly a rogue super trader going by the name of Igor, but which may in fact be a group of super traders, has been making a fortune by conspiring to keep the market flat since last November.
Since it would obviously be impossible for one trader, or group of traders, to overpower the influence on the market of large Wall Street brokerage and investment banks, whose program-trading alone accounts for 50% of all the trading volume on the NYSE, plus the 7,000 hedge funds that are out there, also able to either buy or sell short, it seems Igor needs, and has, some pretty powerful co-conspirators. According to my 'informant' they include large institutions, and even the Chicago Mercantile Exchange itself. The 'evidence' is that several traders have told him that is what is happening, including one trader who had no other explanation for how he could have suffered a huge loss on a particular trade. It had to be a conspiracy against him. Sure.
A few years ago a similar conspiracy theory, this one regarding gold, spread across the Internet and through newsletters. The price of gold had been in a long bear market, and international central banks, probably tired of seeing the value of their gold reserves disappearing, began selling gold from their reserves. That selling did push the price of gold down further, and frequently stopped attempts by gold to rally. Suffering gold traders soon came up with conspiracy theories to explain their problems. The most popular was that world central banks, including the Federal Reserve, were in a secret conspiracy to keep the price of gold low, for some obscure reason.
Those buying into conspiracies, and believing the stock market is being deliberately held flat by a conspiracy, may wind up as surprised as those who swallowed the gold conspiracy theory were, when gold soon reversed direction and began its powerful new bull market.
History tells us that a market that is flat for a long period is setting up for its next move, and the move is often big. The problem is that flat volatility by itself does not reveal the direction of that move.
In any event, there are more than enough simple, common sense reasons for the flat market, without involving conspiracies.
AI
