Is the Stock Market Rigged???

On the surface, contemplating the answer to this question seems merely – interesting. That is, if you’re given to this type of speculation at all. Otherwise it may fall somewhere between garden variety conspiracy theories and aliens in the cornfields. So why even ask is the stock market rigged?

If you have a significant portion of your money invested in stocks, the answer to this question might be more important than it seems; it may define how we approach investing in the stock market!

In my younger days – back when I believed the world truly was the place it seemed to be – the idea that an investment conglomeration the size of the stock market might be manipulated to any serious degree was just beyond my paradigm. After all, if that’s the case then how do you plan a strategy for it? (Which actually is the point of this post, but more on that later.)

The Evidence of Stock Market Rigging

Is the Stock Market Rigged???
Is the Stock Market Rigged???

The performance of the markets over the past 20-25 years has to make even a cynic wonder if there isn’t some coordinated effort taking place. Think about it: extended periods of steady, predictable, virtually relentless market increases, followed by punishing crashes. That includes three since 1987, to be exact.

Either we’re experiencing mass hysteria on the way up AND on the way down, or something else is taking place. When that “something else” works, it works flawlessly (the extended bull markets). But then those are followed by a wealth-draining crashes that undermines the entire credibility of the escalator ride that preceded it.

There’s a disconnect in there somewhere and that opens up some interesting contemplation.

As I see it, there are three possibilities:

  1. The stock market IS rigged.
  2. The stock market is just doing what it does naturally.
  3. Or perhaps the stock market is doing what it does, but subject to incidental influence.

Let’s consider each possibility in greater detail, and more importantly, the implications for strategies to play them.

The stock market IS rigged

The evidence for rigging:

  • The extended bull market/crash cycles have become too predictable to be explained by mass human behavior. Even in a herd, we’re just not that rational.
  • There’s an obvious and growing disconnect between the stock market and the real economy. The market has shown that it will rise even during the worst circumstances.
  • During the bull market phases, corrections of more than 10% are virtually unknown. Natural human behavior doesn’t support that level of consistency.
  • When the market is rising, any news is good news. Or put another way, nothing can derail the bull.
  • The stock market is a critical barometer of the health of the economy and the political implications that carries. For this reason alone the potential for manipulation cannot be dismissed easily.

And now the obvious question: why the crashes if the bull markets are so well orchestrated?

That’s the problem – they work too well. The only thing that can stop them are periodic system hemorrhages, which may be why the crashes have become as regular, predicable and extreme as the bull markets themselves.

A strategy to play the rigged markets: Buy in after the next crash and hold until valuations become ridiculous. They will, and if the pattern holds, they’ll stay there for longer than anyone thinks they can (still more evidence of manipulation). Sell when you think that point has been reached. As a fail safe, sell on a 20% market slide. That’ll be solid evidence that the manipulators have lost the handle on the run up and something worse is coming. As to stock selection, get as close as you can to the latest edition of the “Nifty Fifty”. Or, failing that, punt and go for index funds – you’ll win either way. The deck is stacked so it’s guaranteed!

The stock market is just doing what it does naturally

The evidence for natural cycles:

  • The stock market has always swung in both extremes as part of the ebb and flow of economics, world events and collective psychology.
  • The economy goes in boom/bust cycles, which affects the swings in the market. That said, the historic correlation is more approximate than exact.
  • The disconnect between stocks and the economy is more of a timing issue. As a speculative venue, the market will rise well in advance of an anticipated economic recovery.
  • Crashes are driven by nothing more sinister than human greed coming to its inevitable conclusion.

A strategy to play the natural market: This is the most chaotic of the three possibilities because no one is driving the market in one direction or the other. Valuations and individual stock selection are critical if this is the environment we’re truly in. Playing the averages through buy-and-hold will be a suckers bet, especially in a choppy economic backdrop.

The stock market is doing what it does, but subject to incidental influence

The evidence for incidental influence:

  • Interest rates are influenced by the Federal Reserve to control inflation and economic growth. Low interest rates are good for the economy, and also favored by investors.
  • Money supply is also used by the Fed to control inflation and economic growth, and has a secondary affect on stocks, one way or the other.
  • The government will pursue overall policies of economic stability and growth, which benefits the stock market.
  • By promoting free trade and certain foreign treaties, the government seeks to improve the country’s international position, which is seen as a positive by investors.
  • It’s highly doubtful that the stock market figures into the government’s decision to take certain military actions. But Wall Street seems to like them nonetheless.
  • Exchange traded funds (ETFs) have exploded in popularity in recent years. The steady stream of retirement funds into ETFs keeps the market moving consistently higher. (Sidebar: ETF investing is less about investing in stocks than it is about investing in markets. Fundamentals aren’t even a factor with these funds.)

In each case, there’s an intentional action by either the Fed or the government that has some affect on stocks. Because the Fed and the government seek positive directions, the effect on the market, if it’s apparent, is mostly incidental.

A strategy to play the incidentally influenced market: Very similar to that used for a rigged market. The net effect of an influenced market can be indistinguishable from a fully rigged one. The elevator is programmed to rise, but its course isn’t as certain. Invest in the Nifty Fifty or index funds, but valuations can’t be ignored in this scenario.

My thoughts – for what they’re worth

In my opinion, we’re sitting somewhere between incidental influence and a fully rigged market. The consistency of the markets – the relentless and prolonged rises, periodic crashes (we went nearly 60 years without one before 1987) and the fact that the market seems to close higher on most Fridays – seems like too much to ignore. Nearly every major sector of the economy is in some way propped up by the Federal Reserve/Federal Government. The stock market is too big and too important to be ignored. And so is the volume of money it contains!

Do you think the market is rigged, influenced or in a completely natural state? How do you recommend playing it, especially if you think it?s rigged or influenced?

( Photo by Sister72 )

16 Responses to Is the Stock Market Rigged???

  1. A thought-provoking article, Kevin.

    I believe that the market is behaving as it always has and as is natural. There’s a natural force at most times pushing stock prices upward (the Get Rich Quick impulse possessed by all) and a natural force pushing prices downward once they get to insanely dangerous levels (the economic reality that market prices must ultimately reflect the economic realities for the market to continue to function). When the two forces come into conflict, there is a crash or a series of crashes and then the process begins again.

    I do NOT believe that we are doomed to seeing this process play out in the future. This crazy bull/bear stuff is indeed NATURAL, as you suggest in your description of it. But humankind has in many areas of life endeavor advanced beyond unfortunate natural realities. It is natural for us to live in darkness at night. But we have learned how to harness electricity. it is natural that we must leave the house to attend to bodily functions. But we have learned how to build indoor plumbing. The Reasoning Animal is capable of OVERCOMING the natural when it becomes dissatisfied with it.

    We need to become dissatisfied with the natural bull/bear cycle. It was one thing to have huge stock crashes when only rich people were invested in stocks. Today, most middle-class people invest their retirement money in stocks. For us to continue to permit the wipeouts that have been characteristic of this asset class throughout its history would mean the end of our free market system. Middle-class investors do not possess the levels of reserve wealth needed to recover from the losses that inevitably follow in the wake of out-of-control bulls. Fortunately we now have 30 years of academic research showing us the grave flaws of the Buy-and-Hold approach (which encourages the Get Rich Quick impulse) and how to build a far more effective valuation-informed model.

    This economic crisis will likely be the worst we have ever endured because stock valuations went far higher in the late 1990s than they did even in the months leading up to the Great Depression. But this economic crisis will also likely be the last that will be caused by out-of-control stock prices. We now know a better way. After the next crash, there will be more and more people open to learning about the better way and we will be on our way to the greatest period of economic growth in our history.

    It’s always darkest before the dawn. Sometimes it takes the pain of darkness to remind us of why learning a new way often turns out to be such a wonderful thing. This economic crisis is just something we need to endure on the way to learning about a much better and more human way to invest.

    That’s my sincere belief, in any event.


  2. Rob – outstanding point about the middle class being so deeply invested in the market. It makes all of these caveats even more necessary. I think part of the problem–made worse by extended bull markets–is that people lower their guard, and begin to think of the stock market as benign–which it most certainly isn’t.

    During the 90s one of the major magazines ran a front cover post about mutual funds as the new savings accounts! That’s pretty extreme and I think we’ve backed off from that a bit. But it does serve to highlight how long term patterns can create delusions. The hook there was that mutual funds had become so reliable in the 90s that they werer functioning like savings accounts. It becomes forgotten that savings accounts don’t crash like mutual funds.

    Still, the problem that I have in looking at the market over the recent past is that it does seem too predictable for a speculative market. All of that tells me something is amiss. It’s that predictability that sucks people in, and usually at the worst possible times (ie, market tops).

    I agree that we need to get back to a normal market driven by valuations, but at the moment we seem to be dealing with something very different. I’m with you that the next avalanche will probably bring us back to our collective senses, and that will be the time to dive in. In the short run, nothing should be discounted.

    It’s doubtful that the middle class can sustain another major hit like the last three. They’re still realing from the last one.

  3. Perhaps the question is “Is the market rigged against the little guy (retail)?” The answer would be yes, much like the ocean is rigged against fish with no/little defenses. But no one said that it had to be an equal playing field.

    Two things though. First, computerized trading is a menace to everyone who does not have it. A rapid stream of tiny sell blocks is an economic way to simulate a panic situation, which can drop a stock drastically. If you put that sell in as one large block you would not move the stock all that much. It should be illegal to do this – limit the number of trades in a small time period on an equity.

    Second, it would appear as if the Fed deliberately went to its primary dealers (cronies) to buy treasuries so that money would be pumped into the stock market. Sounds like a good thing on the surface, yes? But its kind of like being on anti-depressants 24-7 when you were OK to begin with. Collaring the natural emotional character of the market and preventing its advance-retrace cycle will end in disaster eventually when the non-Fed players crack. Having a player with infinite money and no natural variation in its motivations is unnatural.

    There’s a difference between “rigging” and “being a bad citizen”. The former implies there is one or a small number of colluding entities at the center of every trade blocking your success. I don’t think that would be accurate.

    People can be predictable BTW, that’s the reason behind Elliot waves and cycles and such. Typically in a major crash and its aftermath there is a certain behavior pattern that repeats throughout history. But people seem allergic to the thought that they are predictable, they are not individually, but collectively they often are.

  4. TodG – “But its kind of like being on anti-depressants 24-7 when you were OK to begin with.”–that’s very well put, and it seems to describe a culture wide phenomenom on a number of fronts.

    I also agree that it might be better to say that it’s rigged against the little guy. The only real chance that the small investor has then is to swim with the tide–be fully in the market on the upside, and completely out on the downside. The skill then is to recognize the signs that would indicate that the shift is taking place well before it’s too late.

  5. Oh boy did I used to have interesting discussions about this with clients all the time. It’s interesting what some believe if you give them an avenue to talk. I tend to lean towards the incidental influence overall. I know it’s easy to feel like it’s rigged and just get out of the market altogether. I can understand that feeling on one level, but where else will you go to grow your wealth. All that said, we do face headwinds as retail investors, no doubt, and there’s no ay around a lot of it. But, that just causes us to be more informed and able to move quickly, the latter of which the big firms are unable to do as it would create too much havoc. Great insight btw!

  6. Hi John – I think the main reason for even venturing into this debate is precisely so that we can stay in the market. If you know what you’re dealing with you can invest more confidently. Long term, there really is no investment alternative to the stock market (other than real estate or starting your own business).

    If we suspect that the market is rigged, that will make it much easier to play the wider swings.

  7. It’s probably somewhere between being rigged and there being incidental influence. Whether or not it is rigged, I think the stock market is a necessary evil…there aren’t that many places to put your money that will give you a decent return. So I just invest in diverse index funds with low fees and ignore the stock market gyrations.

  8. Hi Andrew – If it is rigged, it might be better to sell after big price run-ups, then buy in after the crashes. You can make money by waiting out the crashes, but it strikes me as counter productive to hold on to stocks when valuations reach absurd levels.

  9. It seems to me that as more and more people are invested in the stock market there are few and few people, as a percentage, that are actually buying stock based on any sort of valuation of the underlying companies.

    ETF basically buy the market or all the stocks of an index. A lot of Mutual Funds have the market index or another index of the market as their bench marks and in order to do well against their benchmark, buy the market or all the stocks in an index.

    It would seem to me that this has to have an adverse effect on the stock market.

  10. Hi SP – I agree with your assessment of the market. When record levels are reached, as they have been recently, the market rises by feeding off of itself. This happens when people keep pouring more money in, betting on still higher prices even though even current price levels aren’t supported by valuation levels.

  11. I do not think that you understand what I was trying to say. Originally stocks were all individually bought and sold in stock markets. People made decisions on what were good or not so good stocks and bought (or sold) accordingly. When people buy the ?index? they are buying all stocks in the index and therefore this raises all boats. Selling the index does the opposite.

    Does not matter is how good or bad a company is, all are bought or sold. So all companies are treated alike, it; does not matter whether they are good or bad.

    Most ETFs are a way to buy the index or various indexes of stocks. Unfortunately, most mutual funds are the same as they have benchmarks that are some index and they tend to be closet indexers. A lot of pension funds are going the same way.

    I would surmised that a lot of stocks are being bought and sold, not on their merits but because they are part of an index. I worry that this is going to adversely affect the stock market and how it operates.

    So, is the market rigged? Or is it less conspiracy and more Pogo? (As in, we have found the enemy and it is us.)

  12. That’s an excellent point SB, sorry I misunderstood. Index funds are taking the discretion out of the picture, and in the process they’re also removing fear from the process. Fear is what keeps us from over investing, and when it’s gone…we get what we have, a market that rises to insane levels, then crashes.

    I’m not prepared to say that this invalidates the manipulation argument. At some level that investor mindlessness might make manipulation even easier.

  13. “If it is rigged, it might be better to sell after big price run-ups, then buy in after the crashes. You can make money by waiting out the crashes, but it strikes me as counter productive to hold on to stocks when valuations reach absurd levels”
    I think it is difficult to determine when there has been a price run-up and when valuations are absurd levels. I think buying and holding index funds is safer than trying to make predictions.

  14. Hi Andrew – That’s true, we can never know with a high level of certainty. But we can see the trends. For example, with the Dow hovering around 15,000, now would be a good time to take profits, especially given that the market has more than doubled in the past four years.

    It’s largely a matter of overcoming greed and fear, the two emotional drivers of the market.

  15. Totally rigged.

    You can see this very simply on days where you have a 300 point drop on the Dow , and then a 500 point gain in the last hour

    Who is panic buying after 7 hours of constant drops?

    no further proof is needed

    As for strategy…. Just look out for resistance either direction and trade accordingly

    Allow minimum of 300 point movement on Dow…before assessing any directional movement

    As otherwise you will be stopped out …. Never use stop losses but close manually

  16. Hi Eddie – You can also see it in the pronouncements and actions by the Fed. They were hell-bent to raise the Fed Funds rate but put a stop to it at the end of 2018 when it was disturbing the market. People think of 2.25 – 2.50% as “high interest” after years of near zero rates. But if they ever go up to the historic norm of 5-6% that’s when you’re going to see “blood in the streets”. But I don’t think that will happen. If anything, they’ll cut rates to keep the markets levitated. And all the market seems to care about is interest rates and what the Fed does.

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