Did Anyone Hear What The Fed Just Said?

Sunday, October 2, 2016

Federal Reserve Bank

For years, all I would hear is how the Fed has the market’s back.  I would hear about how the “Plunge Protection Team” will backstop the market and not let it fall.  I would hear about how this stock market has been manipulated higher and higher, and that it is a false market driven by the Fed.  In fact, many have taken it to the point where they are convinced, and are trying to convince others, that the Fed is actually buying the stock market to keep the market aloft.

Yes, for years we have all heard these propositions over and over and it has been widely accepted as “truth” simply because it has been repeated so many times.  I mean, if everyone is saying it, then it must be true, right?

And, now that analysts have jumped on the bandwagon, this fallacy has been propagated to an all new realm of the sublime.  I have seen one analyst after another suggest that the market did not move in the manner in which they expected because the Fed or some other invisible hand supposedly moved the market against them.

When an analyst is wrong today, they no longer say "I was wrong," nor do they attempt to analyze why they were wrong.  Rather, they simply claim it was due to "manipulation" by the invisible hand of the Fed or they simply ignore it.   So, in today's market, analysts are never wrong.  It seems we have created a new and improved analyst community.

In truth, I simply think it speaks to the weakness in intellectual honesty and true analysis within the analyst community, as well as the general dishonesty of so many, which has clearly lead to the general distrust of analysts that has grown over the last number of years.   It is sad since the ones who are hurt most by their superficial analysis and dishonesty are investors who then are forced to part with their hard earned money.

So, let’s see if we can put this issue to rest.  First, I am going to provide to you a quote from Janet Yellen, which was just recently said by her:

“the Federal Reserve is not permitted to purchase equities.”

Do I need to print that again?   Yes, you read that right.  So, for all those that claim this market has been manipulated higher due to the Fed buying equities, let's stop the nonsense already.  The Fed is not legally allowed to buy equities, and Ms. Yellen just publicly confirmed that and stated that it does not buy equities.

And, the concept of the “Plunge Protection Team” actually causing analysts to be wrong is equally ridiculous.  Yet, so many continue to dishonestly propagate this nonsense.  

The last two weeks of October 1987 saw the equity markets shed approximately 22% of their value. After this market crash of 1987, President Ronald Reagan created the President's Working Group on Financial Markets to recommend solutions for enhancing U.S. financial markets, preventing significant volatility, and maintaining investor confidence. The group consisted of the Secretary of the Treasury and the Chairmen’s of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Thereafter, this “Working Group” became known as the Plunge Protection Team, and many believed that this “Team” would intervene at the appropriate moments to prevent significant volatility in the markets, which would, thereby, prevent market crashes in the future. As the myth has been perpetuated, it can supposedly do this by convincing banks to buy stock index futures, or by having the Federal Reserve do the buying (even though the Fed is not legally allowed to do so, which Ms. Yellen recently confirmed). The goal was supposedly to allow markets to correct in an “orderly” fashion so as to “maintain investor confidence” in our equity markets.

Since the supposed advent of the “Plunge Protection Team” in 1987, I don’t think that anyone can fool themselves into believing that we have not experienced periods of significant volatility. In fact, the following instances are just some of the highlights of volatility since the supposed inception of the Plunge Protection Team:

  • February of 2001: Equity markets declined of 22% within seven weeks;
  • September of 2001: Equity markets declined 17% within three weeks;
  • July of 2002: Equity markets declined 22% within three weeks;
  • September of 2008: Equity markets declined 12% within one week;
  • October of 2008: Equity markets declined 30% within two weeks;
  • November of 2008: Equity markets declined 25% within three weeks;
  • February of 2008: Equity markets declined 23% within 3 weeks;
  • May of 2010: Equity markets experienced a “Flash Crash.” Specifically, the market started out the day down over 30 points in the S&P500 and proceeded to lose another 70 points within minutes. That is a loss of 9% in one day;
  • August of 2011:  Equity market declined 22% within 3 weeks;
  • August of 2015:  Equity market declined 13% within 2 weeks;
  • January of 2016:  Equity market declined 15% within 4 weeks.

Based upon these facts, you can even argue that significant stock market “plunges” have become more common events since the advent of the Plunge Protection Team, especially since we have experienced more significant “plunges” within the 30 years after the supposed creation of the “Team” than in the 30-year period before.

So, if an analyst attempts to explain that they were really not wrong because of the Fed or the PPT or some other invisible hand buying the market to move it opposite of their expectations, either call them out on their dishonesty, or simply move on.  You work too hard for your money, and you should not allow anyone who is dishonest to provide you “guidance,” especially when it is clear that they are trying to conceal their analytical deficiencies behind commonly accepted fallacies.

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Courtesy of Elliottwavetrader.net. 

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Avi Gilburt

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net); a live Trading Room featuring his intraday market analysis (including S&P500, metals, oil, USD & VXX); interactive member-analyst forum; and detailed library of Elliott Wave education. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at info@elliottwavetrader.net.