The Dow Report: Manipulation

By Tim W Wood CPA, August 26, 2005

Recently, I have been receiving a few e-mails from listeners questioning me on market manipulation. We all know that the Fed has cut interest rates, pumped M3 and talked the stock market up. Sure, these are all efforts to "control" the market. We have all heard the stories of the "PPT" and how "they" are buying the market in an effort to hold it up as well. As a Dow theorist, my views on this are exactly the same as Robert Rhea's. There have always been efforts to "control" the market and there has always been talk about how "they" do it as well. I feel that I can best address this topic by quoting our Dow theory forefathers. The following text was taken 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 to 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.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

"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. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, �Between the Chains,� in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing." (The Stock Market Barometer) "...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)

"The average amateur trader believes the stock market is guided in its trends by a certain mysterious "power," this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted."

"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 $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!"

Now, we know that this is not the early 1900's. We also know that today the Fed has more tools available to influence the market as well. But, we also know that the markets are much, much larger than they were in these early 1900's and therefore I have to ask, "Even though the Fed has more tools available, is this fact over ridden by the fact that the market is now many, many times larger than it was then?" "Can the Fed actually hold the market up for ever and ever and create a period of endless prosperity without the market ever experiencing Phase II or Phase III of the bear market?" "Is this time really different?" "Could we have actually seen the first one legged bear market ever and is it that easy Al and the "PPT" have changed these historical market relationships?" "Or, has all of this intervention just served to extend, but not change the inevitable?

My opinion is that this time is not different and the Fed cannot create endless prosperity, "PPT" or not. I believe that, at best, any efforts to manipulate the market only serve to postpone the inevitable and that the market is just too big for any manipulative efforts to have a permanent or long term effect.

Furthermore, I will argue that it really doesn't matter if these manipulative efforts are successful or not, because according to the Dow theory and technical analysis, the averages discount everything. In other words, there is always some driving force behind price. Sometimes this force has a positive impact on the markets and sometimes not. The bottom line is that events are discounted into the price of the averages. All we have to do is read the averages and not worry ourselves about why price may be going one direction or the other. The "Stock Market Barometer" has been forecasting stormy conditions for some time now and I know that most people are completely discounting these warnings. Oh yeah, I know the story well. "The Dow theory is broken and it doesn't work any more." Well, this was also said before in history when the general consensus was that the powers that be had everything in control. Whatever the extent of manipulation is today does not matter as it will fail and the natural forces of the market will prevail. Until the Stock Market Barometer's forecast changes, the storm clouds continue to gather.

Tim W. Wood

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Tim W. Wood CPA
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