Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

How to Manipulate the Stock Market With Only $12 Million Per Day- Trannies
http://www.financialsense.com/Market/wrapup.htm

If I ever wanted to manipulate the stock market without being detected and using the smallest sum of money possible, here is what I would do. (Ethics aside) First, I would accept that I could not do the job by buying or selling bulk shares of stock because that would take too much of money and it would not be possible to avoid detection. Therefore, I would try to quietly influence the trading of large sums of money by institutions. The means I would use to mobilize these large sums of traded money would be to manipulate the technical analysis tools that many market participants are using.

We live in times where technical analysis is increasing in importance because as financial bubbles continue to re-inflate, the disparity between fundamentals and share prices widens. All that’s left, as a basis to own stocks is the technical charts. It would be impossible to manipulate company fundamentals or news in a meaningful way without being detected. Therefore I would concentrate my efforts on the technical analysis characteristics of company stocks.

I would attempt to manipulate the technical indicator that had the greatest combination of:

Extent that financial institutions and the public used it.

Ease by which the indicator could be manipulated.

This would lead me to the Dow Transportation Index. Why? Dow Theory is one of the most widely used of technical theories. (A summary of Dow Theory is below.) It involves establishing the trend of both the Dow Industrial and Transportation indices to establish whether their respective movements confirm each other to establish the primary trend of the stock market. According to Dow Theory, when there is confirmation of the direction of the trend, traders may trade in the direction of that trend. This Theory is a cornerstone of the most widely used textbooks on technical analysis, including those used by the Market Technicians Association to certify their members. Such market technicians are increasingly employed by financial institutions and therefore, have an increasing influence on markets. If enough people study and trade on the technical characteristics of the markets, they become the market. By manipulating the Dow Transportation index, I could keep a large proportion of technical traders on the same side of the market. At the very least, I could create enough Dow Theory confusion to keep many traders and a lot of money out of the market or away from shorting stocks. Could I do this with a relatively small amount of money? Yes! I will describe how. Below are some key statistics on each component of the Dow Transportation Index.

My goal would be to manipulate the Transportation index by moving the prices of stocks that had the best combination of share weighting (high is better), and share liquidity (low is better). The Dow Transportation Index is a share-price weighted index. For example, the first company listed, Alexander Baldwin (ALEX) comprises 4.76% of the Dow Transportation Index. Over 20% of the index is comprised of two companies - United Parcel, and Fed Ex. While it may be a good idea to try to manipulate the companies that comprised the largest proportion of the index, it would be more efficient to consider liquidity as well. All other things being equal, I could manipulate the index more efficiently if I could move the prices of those companies that had the least amount of liquidity. It would take fewer shares traded to move those company’s stock prices than the more liquid stocks in the index. For example, I could move Alexander Baldwin, which trades an average of 200,000 shares per day a lot more efficiently than Southwest Airlines, which averages 3.5 million shares per day traded.

In the fourth column of the Table above, I have listed what I will call a “Push Factor” for each company in the Dow Transports. The Push Factor is the percentage weighting in the index divided by the average daily volume traded (times 1million). Combining the companies, which the highest percentage index weighting and lowest liquidity results in the highest “Push Factors”. These are the companies that one can use to most efficiently move the entire index. As you can see from the table above, over 69% (105/152) of the combined Push Factor comes from a total of only 7 stocks. These 7 stocks trade a combined average daily volume of only 2.84 million shares per day. I could therefore account for about 10% of the trading volume of these stocks (containing 69% of the index “Push”) using only about $12 million per day. This would likely be sufficient to manipulate the prices of these stocks and as a result, of the entire index. By contrast only one stock in the Nasdaq index, Intel, trades an average of 57 million shares per day. It would take $161 million to provide the same support to Intel’s share price, as only $12 million would have for all of the 7 double-digit Push Factor Dow Transport stocks. Whereas the 7 stocks have a Push Factor accounting for 69% of the index, Intel makes up less than 5% of the capitalization-weighted Nasdaq index.

As you can see from the discussion above, manipulating the Dow Transportation index would be relatively easy. Moving this index by way of manipulation would have a ripple effect on the large number of traders and investors using Dow theory. It would be pretty efficient market manipulation for only $12 million per day. Since it can be shown that the Dow Transports can be manipulated relatively easily, and given the out performance of the Dow Transports, conspiracy theorists would have to question if that is happening now. Following is a 6-month chart of the Dow Transport to Dow Industrials Ratio. It makes one wonder if something is afoot.



Following is a graph showing the dividend payout percentage of the Dow Transport and Industrials indices from 1987 to the present. If there is something that is driving the transports higher in greater proportion than the overall stock market, it is not declared dividends. The transports, with a current dividend yield just over 1.09%, are anything but historically cheap. The Dow Transports presently trade at a 20-percent premium to the 17-year average dividend yield of 1.31 percent (not including the 1988 high “off the chart” yield). For what it is worth, the stock with the highest “push factor,” Alexander Baldwin, just announced their latest dividend last week (no increase).

Today’s Market
All of the major indices were down today on relatively high volume. Amongst all of the rah-rah talk that is ringing in my ears from the cable TV folks, some bearish patterns seem very much intact. The S&P, Dow Industrials, S&P 500, and Nasdaq have just finished making a lower high. Here are 6-month charts: