Does the Fed really have a choice, given that the game is now for all the marbles?
We all know the global economy is slowing, so why would stocks soar from here? The basic answer was articulated by Chris Martenson: because this game is for all the marbles.
If the Powers That Be let markets melt down from here, where's the bottom? Where's the plan to bail out all the pension plans, banks, insurers, etc. that will be crippled by a full-blown market meltdown?
It would be a lot cheaper and less painful to prop up stocks at these levels (a 10% decline) rather than let them fall off a cliff to a 40% decline.
Many people dispute the idea that central planners can prop up the stock market once sellers panic. This is a worthy discussion, and the general point of disagreement is planners' ability to counter big-volume selling.
In other words, it may be possible to elevate markets in low-volume settings, but once selling picks up, planners lack the tools to stem the tide.
On the other side of the debate are those who wonder if the panic declines are as engineered as the lofting-ever-higher uptrend. What If The "Crash" Is as Rigged as Everything Else? (August 26, 2015)
Here is a daily chart of the S&P 500: the wedge could break either up or down, but the stochastics and MACD are somewhat constructive. It wouldn't take much of a rally to crank out a bullish cross in MACD.
The basic mechanism for pushing markets higher has been around since the 1920s. The game only requires two players colluding: one player buys everything at the ask and then some, pushing price higher. The second player picks up the baton and does the same, and then passes the baton back to the first player.
Once others see the rising trend, they start buying, and both players can sell a bit into the uptrend. When price reaches a line of resistance known to every technician (and trading bot), the players push price decisively through the resistance. This triggers more buying, and the players can sell a bit into the rally, until the next resistance line requires a push.
At some point, those who expected a drop and shorted stocks to profit from the decline will have to cover, i.e. buy back shares. This buying pushes price higher, a surge the players can accelerate with tag-team buying at critical levels.
As each level of resistance is surpassed, those tempted to sell start doubting the wisdom of selling in a new uptrend. Those who keep shorting at the next level of resistance are soon forced to cover (i.e. buy stocks) as each level of resistance is taken out.
At the end of this game, price is catapulted to new highs, forcing the last bears to cover. At this point, those who had their finger on the sell button are now congratulating their patience, and those who recommended buy the dip are proven correct.
The problem for technical bears is every technical system has been programmed into every trading program. Once you know that observers are keying on specific levels, the game boils down to blowing through those levels.
This has nothing to do with fundamentals or what should happen in a recessionary global economy. It has everything to do with managing news flow, expectations and the order book of insiders.
The Fed certainly has the power to drive a sword into the heart of equities by talking up trightening very aggressively. Maybe the Fed will slay the stock market at its meeting next week.
But what's the game plan to save everyone that's blown out of the water as a result of all that tough talk?
We aren't privy to the closed-door discussions, the informal talks and the game plan for proxies, dark pools of capital, etc., so we'll just have to see what happens. But it is a lot easier to reverse a 10% decline than a 40% decline. What would you do in the Fed's shoes? Let the market have its way, or crash it with tightening?
More to the point: does the Fed really have a choice, given that the game is now for all the marbles?