Trader Note


Manipulated Markets Also Meltdown

As the market makes all-time highs, it should be known that short interest is making sever lows. These shorts have become disillusioned with these markets because their accounts have been beaten to the point of failure. This long term losing streak has left the markets fragile.

Short interest should be at least 10% for a healthy market but currently it is under 2%. As price moves lower, shorts are exiting their positions. This halts price declines because people selling have available buyers. If there are no short positions exiting markets, then the bottom drops out of the buy side and markets move limit down.

When price makes new highs, shorts puke at the top and will re-enter markets. This creates price stability as overzealous buyers find available sellers. Without the shorts, at the top of price action, the only sellers are longs exiting the market. In a manipulated market, where most longs in that market just want to ride the bubble, prices artificially move higher, unchecked. When the longs start to sell out of massive positions, there is a cascade failure where price collapses. The collapse occurs because scared longs that entered in at the peak are trying to exit. It also occurs because margin calls are made and margin rates are raised at the worst possible time for markets. Smart traders will then re-enter the market on the short side, farther slamming price. Remaining shorts will then pile on to give the skilled traders an exit. This is how the bubble bursts.

In these manipulated markets, money is being pumped into the system to artificially inflate prices. This means that while stock soar, bonds are also being bought up (these two SHOULD move in opposite directions). Bonds are normally bought when there is fear in the market. This buying drives the yields lower, making it less attractive to own bonds. In a normal market, with stocks soaring, the yield should be very high so that investors are encouraged to buy bonds relative to a stock position paying an estimated 7% yield (many funds use that as an estimate, even though it has been hard to hit half of that target).

Gold is used as honest money; nobody wants gold unless it is for jewelry. Gold price should soar when money is being printed because you cannot print more gold. Gold should be sold off in a market where stocks soar because gold doesn’t provide yield like a dividend of booming companies’ shares. Gold is a hedge against currency printing because the same amount of gold in grams should buy nearly the same amount of food, resources or fuel. In the current market, gold price has been heavily suppressed even though it has moved higher through the QE (currency printing) process. If gold were allowed to freely float when compared to the existing money supply, it would like shock most investors (estimates are between $5000 and $50,000). However, gold is an indicator of failed policy, so it cannot be allowed to rise in price even though smart central banks are hoarding it.


Investors should be fearful of such markets. If you are not sitting in front of the screen watching on a tick-by-tick basis, then you will probably not be able to exit fast when the market changes. If you are tied up in funds, then you will experience a 3 day losing streak while your try to exit those funds. These market changes will decimate your accounts.

Traders should take the money out of the move higher but be on guard for the collapse. Traditionally, market collapses have taken days to unfold. However, in the modern digital trading environment, the recent collapses have unfolded in a single day (like Brexit). In many of these minor collapses, the Plunge Protection Team have come into markets to shore up prices and return a semblance of calm to markets. This perceived calm has brought money back into markets and driven prices to new highs.

Calm markets have only generated higher prices because big money is desperately looking for places to make money. Years ago, money was invested in bonds as a safe place to generate revenue. Bonds do not generate revenue anymore (negative yields mean that bond holders are paying to loan out money) but big companies (Banks, funds, etc.) are required to hold onto them so they continue to be bought up. Big money firms have to find other places to get yield, which often only leaves the share markets if liquidity is necessary. This means that share markets are seeing huge amounts of capital coming into market that is only trying to get a few percent. These funds want to make a yield near par with the index price, so once that is achieved they are ready to sell out. When they all sell at once, mostly of high value blue chip shares, then the markets feel the pain as a collapse. This is where the PPT would traditionally step into markets to buy up key shares.

For the PPT, this market repair of catching a falling knife becomes more difficult as market size grows by money printing. Every doubling of money requires at least a doubling of capital infusion to allay market fears. This amount increases based on the volume of selling (or the amount of fear). As participants become aware of a bubble forming, more of them are preparing to exit quickly. This quick exit will push prices lower at volumes and speeds that will one day outpace the ability to catch that falling knife. Then, the bubble will burst in glorious fashion.


If you are a short in these markets, then don’t bother. Small chops are the best you can hope for. Instead, wait for the moves lower and ride the momentum. Don’t ride too long as the PPT might stall the collapse, again.


If you are an investor in these markets, take money off the table. As the size of the bubble increases and speed of trade becomes instantaneous, don’t expect to exit at par in a collapse. Before that happens, find a tangible place to invest (vehicles, gold, canned food, etc.) that will not be subject to market failure.



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