Microwavable Rallies

Question: How do you cook a stock rally?

Directions: Empty wallet into a microwavable bowl. Mix in any stock index of choice. Add a cup of central bank intervention and a cup of PPT spice. Microwave on high for five minutes. Eat immediately as spoiling will occur quickly as reality sets in.

There you have it. This is the era of microwave rallies. These rallies are cooked and not grown. They are created and not developed. They are instantaneous and not evolved. They are manufactured and not organic. How investors put money to work in stocks today is far different than yesterday. And yet, the media hasn’t quite caught on. The way the media presented it, investors enjoyed the best weekly rally last week (week ending 12/02/2011) since March of 2009. Let’s look a little closer with our magnifying glass of truth. 

Since stock rallies now come to us in very short bursts of buying, the process of investing is more like cooking with a microwave oven as opposed to cooking with a conventional oven. Today’s rallies spring forth instantaneously and dissipate just as quickly. They also tend to be contrived, connived, cajoled, coerced, conjured, and concocted.

The message investors get from these microwave rallies is that investing in stocks has morphed into gambling at casinos. The gambler has no chance to win until the dealer begins dealing cards or the roulette operator spins the wheel. The dealer, operator, and casino owner are all one in the same. They are the Federal Reserve Bank.

In the past, investors bought and sold stocks in a market where prices were discovered by the participants. Today, the market is closed and the casino is open. The casino operators now determine price. As such, money is exchanged in the casino for chips that represent money. Gambling infers chance rather than skill. Gamblers risk the conversion of money to chips for a chance to collect more chips. Since all stocks, sectors, and indices now move in tandem, their values have been stripped and replaced with chips representing prices assigned by the Fed. Skills to discern value are now obsolete. Prices depend on Fed action and gamblers have to commit chips to play. As with the directions above, the gambler puts the chips in a bowl and waits for central bank manipulation and intervention to cook up a stock rally. And today, rallies are usually about 5 minutes in duration.

This past week is an example of modern investing/ gambling. For the week ending 12/02/2011, the Dow enjoyed its best week since March of ’09 with a 780 point rally. Actually, to be precise, there wasn’t so much a ‘weekly’ rally as much as a ‘day’ rally. Actually, to be more precise, there wasn’t so much a ‘day’ rally as much as a ‘minute’ rally. For a five-day trading week, there are 1,950 minutes of available minutes to buy or sell stocks on a US exchange. This past week, the Dow rallied 250 points in the first five minutes of trading on Monday morning and over 400 points in the first five minutes of trading on Wednesday. So, in truth, the 780 rally points on the Dow happened basically in 10 of the 1,950 minutes of trading. A few other micro bursts accounted for the rest of the ‘rally’. If gamblers didn’t have their chips on the table for those 10 minutes or so, they completely missed the rally. Even worse, without those prosperous 10 minutes, the Dow trended lower for the most part. And yes, these 10-minute rallies were inspired by Federal Reserve action. How does a gambler know when the Fed is about to turn all the colors on a roulette wheel to black?

Thus, the modern investor must embrace gambling as a strategy and the potential gains on the gamble are completely up to the Federal Reserve. Of course on Monday, the casino was greeted with news that central bankers were committed to bailing out Europe. That was good for 250 Dow points at the open. On Wednesday morning, the casino was greeted with the news that Ben Bernanke wore bermuda shorts to work. That was good for 400 Dow points at the open. Actually, the news was that Bernanke’s shorts were cuffed so that got everyone going. No, really there was some kind of announcement about a reduction in US dollar currency swap interest rates from 1% to .5%. Big whup! How this will serve to help the governments of the formerly sovereign nations of Greece or Italy extend and pretend their debt away I have no idea. Probably this was a move designed to free up more dollars so the big banks can add more collateral to their eroding sovereign debt credit default swap positions. And, not that the vast majority of gamblers had a clue about currency swaps, the important thing was that an announcement was made about some kind of central banker action. That just has to be good for a rally, right? Start the microwave!

The question now becomes how do gamblers profit from this new casino? There is no way that anyone can confuse the modern stock casino with a stock market. The term ‘market’ means there is a medium where buyers and sellers set prices. Clearly the central banks now conspire to set prices. They do so in microwave-like minutes of trading. We can adopt the term ‘casino’ now for several reasons. First, all stocks and all indices move in tandem. Thus, they are all simply chips that are used to get exposure to the game. There is no value in the chips. They carry a price and the owner of the casino sets the price. Second, casinos offer games of chance. No one goes to a casino to play a game of pure skill like chess, for example. But rather, casinos offer games that involve playing cards, dice, and balls that roll around a roulette wheel until they randomly fall into a red or black colored and numbered pocket. These games require very little if any skill from the player and winning is a function of chance. Third, casino operators determine winners and losers. Casino operators seek to limit gains but they also manufacture winners occasionally to induce the gamblers to keep playing. As with stocks, whenever they seem poised to fail, the central bankers make an announcement that turns the colors of the pockets on a roulette wheel to all black for a spin or two. Everyone wins! 

The chart below is a picture of the Dow for the week in question on an intraday basis with 10-minute bars. We can clearly see the microwave-like bursts of buying linked to central banker action and manipulation. The extra volume at the bottom of the chart would lend credence to coordinated PPT activity. I have circled the microwave events with green and more minor microwave bursts in lighter green. Bear in mind that this chart is showing 10-minute bars but in actuality, the microwave buying was concentrated in no more than 5-minute bursts. Each burst was Fed inspired and Fed driven. 

So what do we do going forward? How do we answer the question posed at the beginning of this article? Let me answer that by quoting Clint Eastwood’s Dirty Harry character. “You’ve got to ask yourself one question - Do I feel lucky?”

DJIA - Intraday 10-minute bars over 5 days week ending 12/02/2011

Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.