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Who Moves the Market?


...the best rule of thumb is that surprises happen in the direction of the trend.


'He'll tempt you with a whirling pool of lies and promises
He'll deny or that he will never keep."
Build A Levee (Natalie Merchant)

"The wicked king of parody is kissing all his enemies
on the seventh day of the seventh week.
The tyrant's volice is softer now but just for one forgiving hour
before the rise of his iron fist again."
-Thick As Thieves (Natalie Merchant)

On the seventh month of a year ending in seven, after seven weeks from the June 1st high, seven years from the bubble peak, the DJIA sold off 700 points in a week.

Is seven the number of panic? It's probably just a coincidence.

The "big breakout" on July 12 should have seen follow through if it was not engineered. It should have seen hesitation for no more than a few days. Whether it was a classic Misdirection Day on the Thursday the week before options expiration or an engineered Buy 'Em to Bang 'Em in order for the Big Dogs to generate bids, I don't know.

Why would they want to generate bids? Perhaps they knew something. Perhaps they know something about a fund or funds going belly-up. Thursday and Friday certainly had the look and feel of forced selling and liquidation.

The fact that there was such a large open interest in Spyder puts (leaving many to suspect that a decline could not occur) suggests that someone may in fact know something: the market usually doesn't accommodate that much open interest, unless it belongs to someone big, someone powerful who is in the loop.

The way the S&P bounced back to nearly unchanged an hour before the close on Friday only to see the plug pulled in the most intense selling in a half hour that I have seen in years suggests that a big fund needs to liquidate before month's end or that a powerful clique wants the market down and has the power to do so. Or both.

Either way, it smacks of manipulation. If a fund has a lot of stock to liquidate, they may refrain from selling midday to generate some bids, but why wait and crush the market in the last 30 minutes, unless they were finishing up?

Click here to enlarge.

All I can say is this: the best rule of thumb is that surprises happen in the direction of the trend.

Whichever way Monday closes, I would not be tempted to take trading positions home as they could just as easliy gap down on Tuesday.

It feels like someone was pushing the market down intentionally late Friday, because in this volatile environment after a break of support, who is going to stand in front of a blizzard of sells in the last minutes on a Friday in the summer? Oh, they're good.

If there was ever a day in which The Working Group was going to earn their keep and step in before the fat lady hit the high notes, if there was ever a moment in which The Working Group would want to step in to avoid a parallel to 1987 and Black Monday with back-to-back Tail Spins before a weekend with the market just breaking support levels and the dollar falling and disintermediation in the credit markets, it was Friday.

They did not step in. Whether they did not intervene because they did not want to, or the late sneak attack caught them off-guard, or there is someone or something just as powerful as the FOMC, The Treasury, and the SEC that is pressuring U.S. stocks is a good question.

Here's a thought. On an interesting note, a senior advisor to Bejing at a China think tank noted foreign press coverage calling China's $1.3 trln in foreign exchange reserves "a nuclear threat".

He went on to say that the government should realize its potential and that China should use its massive holdings of exchange reserves as a 'bargaining chip' in its discussions with foreign governments. Guess who's coming to dinner in China this week? Hank Paulson.

Is someone trying to remind someone who is the Banker and who is the Bankee?

After all, the Chinese trip to Washington to meet with Congress at the end of May went poorly. If it had gone well, there would have been plenty of sound bites. There were none. Also, Congress voted on Thursday to put more pressure on China to revalue the yuan.

The 10-year U.S. Treasury yield exploded afer the end of May. Was this a lack of Chinese participation?

Recently, there have been a number of episodes of contamination of Chinese products imported into the U.S. This is probably just a coincidence, but better build a levee, a levee of discipline, just in case.

Be that as it may, the news certainly breaks with the cycles. When it rains it pours. As if the credit crunch storm isn't perfect enough, the chart below depicts a sharp rally in the Yen last week.

Click here to enlarge.

This affects all those playing the Yen Carry Trade as borrowing in the Yen means you are short of the Yen. If the Carry Trade is unwinding, a levee won't hold back the spill over of the unholy trinity of leverage, derivatives, and a credit crunch.

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No positions in stocks mentioned.

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