PPT Called In, Dow Gains A Thousand Points of Light

‘T was the day after Christmas and all through the bourse,
A rally was surging thanks to seller’s remorse.
Or was the Plunge Protection Team really the source.

Regardless of reason, it was truly spectacular,
Never 20% down, no bear market in Wall Street’s vernacular.
The post Christmas rally gave bulls some hope,
But bear markets are built on just such a slope.

So this rally may give you some holiday cheer,
But the Fed is still tightening.
Which should make you hear,
“Don’t fight the Fed!”
Not now or next year!

So my friends, as we wrap up this troubling year and look forward to Auld Lang Syne, the market spent the day after Christmas, known as Boxing Day in many parts of the world, punching bears like me in the face.

But that’s ok. I have seen a lot of bear markets. I sat through my first one in 1968-69 in the customers’ gallery at Walston and Company. Then again in 1970-71. And, of course, the big one in 1973 and 74. No, I don’t remember 1929-32!

So I went to the wayback machine and took a look at past 5% up days to see what we might learn from them. And boy was it interesting! History is such a good teacher. As the wise ones say, it may not repeat exactly, but it usually rhymes. Better than my terrible poetry. So here is the lesson of history, and what we should do about it.

In both the 2000-2003 and 2007-09 bear markets, there were quite a few 5% up days. Most of them were only part way on the downslope, although the last one helped kick off the new bull. In 2002, the first 5% up day was actually the rigor mortis rally of a dead bull. It came a few days before the bear market started. Two and a half years later, the fifth such day ended the bear market, but the low was tested 6 months later. So there was no reason to chase any of these rallies.

In the 2007-09 bear market, if you include a 2 day 8% rally in  September 2008, there were 8 rallies like this one. They all came before the final bottom.

The 9th one was the charm.

In the big, bad 1973-74 bear market, there was a rally of 5% or more lasting at least a few days in almost every month of that horrendous time. Admittedly the 73-74 bear market never saw a 5% one day rally until October 9, 1974 at the very end of the bear market. That rally lasted into November and the market pulled back to a successful test of the low in December before launching a bull market.

In fact, whatever you want to call this market semantically, no modern market decline of this magnitude has ever reversed into a new bull phase on the first 5% rally. The lesson of history is to be patient and wait for the Fed to print money.

Many folks are hoping that this market is more like the 2011 mini-bear, where there were 2 5% plus days in August. But even they were followed by a lower in October.

And of course, that market was not starved for liquidity. The Fed was merely in a QE pause then, not draining money from the system persistently like it is today. Sure, maybe the Fed will reverse course in 3 months. But there’s never any need to anticipate what the Fed might do. Markets move on the money, not the talk. Be patient. Don’t fight the Fed.

And please forgive me for being cynical but wasn’t it just a couple of days ago that Treasury Secretary Mnuchin announced that he was calling in the Plunge Protection Team (PPT)? It’s highly unlikely that he was acting as a free agent. Wasn’t it just yesterday morning that President Trump told everyone that this was a great time to buy stocks. What a surprise! The Dow rallied 1000 points the very same day.

Call it the fickle hand of fate.

But what about the PPT? The PPT is trader’s lingo for the President’s Working Group on Financial Markets, formed by President Reagan in the wake of the 1987 crash, purported to insure the “integrity” of financial markets. It subsequently became popularly known as the Plunge Protection Team in 1997, after the Washington Post gave it that moniker in a headline. Financial writers began accusing the PPT of propping up the stock market during big declines.

I have absolutely no evidence that this is the case.  What we do know is that the market is starved for liquidity as the Fed pulls money out of the system and the Treasury pounds the market with gargantuan wads of supply. The illiquidity affects the market in both directions. Spreads widen between bids and offers on both the downside and the upside. Dealers are unable to maintain orderly markets in either direction, although to me, the market certainly has looked more orderly on the downside than it did Wednesday on the upside.

We also know that shorts are extremely jealous of their profits. When shorts are threated with the loss of those profits, they cover first and ask questions later. I like to quip that in earth’s final days, when the core of the planet is about to explode, the one thing that you can count on is that the shorts will cover.

So I think that was a big driver of what happened yesterday.

Those of us who’ve been around the market for a while have seen some face ripping rallies in past bear markets. This rally, while truly spectacular, doesn’t surprise me, especially given the suspicious nature of the attendant political theatrics. Do I think the fix was in? I’ll let you be the judge. But even with all the histrionics and theater, this was, after all, the day after Christmas. The professionals are all on vacation.

A quick look at the daily chart here tells me that not much has been accomplished technically yet. Even this month’s sharp downtrend is intact. The market needs to clear 2475 and remain above 2475 at the end of the week to break the trend.  If it does that, the next target would be 2533 and possibly 2580.

Click to enlarge

However, it does appear that the 13 week cycle has bottomed. The last low of that cycle was at the end of October. At that time, a rally lasting 7 trading sessions and gaining 212 points on the S&P 500 ensued. A similar rally from this week’s low would carry to around 2560. But the market would face significant resistance at 2475 and 2530. It’s possible those levels are surpassed, but not likely on the first try.


Click to enlarge

In fact, a 50% retracement of the whole decline would be perfectly normal in the context of a bear market. That would take the SPX back to 2650. And it might not take long.

Any of those outcomes is realistically possible in this environment. Wall Street and the Trump Regime have a lot at stake here.

Not the least of which is the silly 20% “rule” for calling a bear market a bear market. Whose rule is that anyway? Nobody knows who made it up, or why, or even when, but everybody in the media and on the Street keeps repeating this nonsense ad infinitum as if it were fact. Well it’s not fact. It’s a fairy tale. But if everybody believes it, and Wall Street can keep as many customers as possible from selling for as long as possible, they get to survive a little longer.

The Street and Trump have drawn a line in the sand at 2350. They will defend it ferociously. The first leg of the bear market may therefore be at an end. It may take several months for the next leg to new lows to emerge.

During that time you can possibly trade the market both ways, but only if you are nimble. I certainly would not be buying stocks as long term holds here. Nor would I be chasing trades on the buy side here either. If I see an opportunity where buying calls appears to be a good risk, I’ll give a yell on that. I’d consider a few SPY puts if the S&P shows signs of rolling over at the resistance levels I talked about above. But I’d have firm mental stops just above those levels.

Good trading and Happy New Year!

To celebrate a record-breaking year, we’re sending cash…


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