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MARKET MANIPULATION, OR INFORMATION MANIPULATION?

MARKET MANIPULATION, OR INFORMATION MANIPULATION?

We are inundated with market manipulation and conspiracy theories. I will attempt a logical inquiry into this phenomenon. For a good lesson in information manipulation, your best bet is to go to the stock market. Lest you think that Marty Schwartz is an isolated case, read the Ray Dirk’s story. Therefore, I shall confine my study to the commodities markets. The commodities markets are the oldest markets in the world. The various commodities provide significant amounts of data for analysis. If effective manipulation exists, one will be able to track its effects. We will define successful manipulation as having interfered with a commodity’s ability to exhibit the normal accumulation, distribution, and trending zones. This creates an objective benchmark for this inquiry.

Any discussion of market manipulation must be reduced into the elements that might create the belief in the phenomenon. We must first deal with our need to believe in market manipulation. Since actual evidence of market manipulation is sparse, what is generating this tendency to suspect manipulation, or conspiracy? We must further define the process to differentiate between the attempt to manipulate the markets, and the actual manipulation of the markets. A further distinction is necessary. One must distinguish between those processes that are manipulatable, and those processes that are not manipulatable. For example, political and social processes are manipulatatble, and may be nothing more than manipulation, coercion, and conspiracy. Physical processes are subject to the laws of nature, and any attempt to successfully manipulate these processes are possible only by complying with the physical laws involved. One could be found in the position of claiming the laws of nature manipulate the markets. This forces us to examine the true nature of markets. Are they controlled by man, or some bigger force? The final question is the definition of market manipulation. Are we speaking of the intra day price action, or daily price action? The weekly and monthly price charts will show a different picture. Trading ranges behave differently than trending markets.

Do we have a tendency to believe in manipulation, and conspiracies? The answer is yes! The social world we inhabit reveals attempts to coerce, manipulate, and regulate in every facet of social interaction. The attempt to control outcomes to our benefit is part of our survival mechanism. It is indisputable part of existence in a society. However, this does not prove that these conspiratorial efforts are effective in manipulating markets. Aesop once said, "And the mice voted to bell the cat". Many activities are beyond the power of social pressure. The laws and pretensions of humanity are just foolishness when confronted with power of nature. Therefore, any intelligent discussion of market manipulation must properly differentiate between social creations, and those phenomenon that are based on physical reality and it’s laws. A steel mill would be an example of a process that is indifferent to the schemes of society. The only way to increase output is to increase the inputs, or evolve a new technology that requires a complete understanding of the principles of metallurgy. Wishing, hoping, dreaming, and screaming are irrelevant. Social activities and politics are the domains of emotions and perception manipulation, not the commodities markets! Again, J. L. Livermore has anticipated our question. Livermore said, "I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal in success in speculation- usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not so dangerous as when he is trading in stocks or commodities."

The most important facet of market manipulation is the manipulation of information about the market. This is the rock that sinks most investor’s ships. George Soros made an interesting observation about market information.. He said, "Economic history is a never-ending series of episodes based on falsehoods and lies, not truth. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." This observation comes from the greatest currency trader alive. I believe that he has thrown down the gauntlet regarding the value of the information you receive. Does market manipulation exist, or is it merely the lies and deceptions about markets that are the manipulation? George Soros has shared his experience. Leo Melamed, the founder of the International Monetary Market (Chicago Mercantile Exchange), gave a speech. In this speech, Futures, the Coveted Scapegoat, he said, " Derogatory comments, defamatory innuendos, inflammatory jokes, false accusations, misleading opinions, half-truths, out-and-out lies, that is the fate and burden of futures markets. Thus it has been throughout time, thus it will no doubt continue. And why not? From time immemorial, predicting the future has been a hazardous occupation."

We are now ready to look at commodities. Copper is a good market for discussion. Copper is one of the most necessary commodities in the industrialized world. It is also one of the best economic indicators. If one looks at a 20 to 30 year monthly chart, copper is really a gift to a trader. It follows a trend that is very discernible. The weekly trend is also reliable. Gold is a little different in its movements. It has a mystique due to it’s prior role as a backing for currency. It was the backing for many currencies at one time. Richard Nixon "freed" us from the gold standard on August 15, 1971. Since then, there has been no currency in the world that is redeemable in gold. This has not really affected the trend of gold. It is still a good trading commodity, with very discernible trends. Gold is a very valuable metal, having unique properties in medical and electronic applications. It also functions as fine jewelry. It exhibits a well-defined frequency, and has very good liquidity, which is paramount for successful trading activities. The gold market’s liquidity is far superior to the copper market. It is possible that gold provides more trading opportunities now because it is not a currency equivalent. We must remember that the objective is to make profits. Let the rest make political statements. As we look at these markets, we can observe clearly defined patterns of accumulation, distribution, and the movements in between these zones. Learn how to identify these opportunities, and let the market do the work.

When one looks at these markets every day, reality seems to shift. There appear to be many opportunities for profit making. However, Tom Baldwin, the legendary bond trader, has publicly stated that he uses monthly charts. Tom Baldwin is a floor trader, and is using monthly charts. Hello, people! The most successful individual bond trader in the world does not trade against the trend. Ed Seykota, who has the best track record in the world for general commodity trading, has publicly stated that day trading is the equivalent of feeding a slot machine. Seykota knows all about slot machines as he lives in Incline Village, Nevada. Leo Melamed has stated that "How much better and more fun it is to be a lover. A trader who is a lover is a trend player—the trend is his friend. He seeks out the trend of the market and romances it. He loves the market whether it is bull or bear; he follows wherever it leads. If it's in an uptrend, he's bullish or he leaves it alone; if it's in a downtrend, he's bearish or he stays out. He does not try to pick reversals or outsmart the world, he merely wants to follow the market's direction. When a lover increases his position, his original position is profitable and the market shows continued promise. Clearly, lovers also have losing positions, but they never allow it to become a fight with the market. Unlike the fighter, the lover never closes his eyes with righteous indignation, I will be right. Unlike the fighter, the lover seldom blames a loss on the market. He may be wrong, but never the market." Having placed day trading and trading against the trend into the appropriate file on your desktop (recycle bin), we have removed the major illusions of market manipulation. I should mention that there is a world of difference between finding a good market entry point, and the determination of the trend.

Trading ranges act differently than trending markets. It was not that long ago when trading ranges were called On The Side. Professionals would move on to markets that were trending. Anything can happen inside of a trading range. Many times in a market's history, a trading range has turned out be a trend reversal. J. L. Livermore never bought or sold a market that was in a trading range. Richard Davoud Donchian, Bernard Mannes Baruch, and W. D. Gann also avoided trading ranges. Trading ranges are just another rock waiting to sink the investor’s ship. Remember, speculators can not buy hull insurance!

Finally, we must deal with question of the nature of the market itself. Does man control the markets? The commodities markets are based on real, physical substances; the necessities of life itself. The contracts for the grains, the oilseed, the metals, and the exotics are based on the actual cash market for these commodities. The same is true for the petroleum contracts. Seasonality, the weather, plagues, and cycles are just some of the variables that control the supply of commodities. Nature rules this world. El Nino and La Nina have more impact than foolish legislatures, or cartels who would like to manipulate the outcomes. Your governments may appear to control demand, but nature is always in control of demand and supply. Nature even controls your governments in a very real sense. One good plague or natural disaster can devastate the human population. Perspective is very important when listening to the stories of manipulation, conspiracies, or even the purported power of government. This study excludes the financial markets. The new financial commodities are obviously of a different nature, and they have yet to stand the test of time!

The results of this inquiry suggest that market manipulation in the commodities market is more myth than reality. However, information manipulation is rampant. Ed Seykota warns of this problem. Seykota is always terse, and simply calls all such information "funny-mentals". All the information you need is contained in the price and volume histories. I am aware that some will disagree with this conclusion, but it has the advantage of overwhelming evidence on its side. The greatest traders in the world agree with this conclusion. This has been true for many generations. E. H.Harriman, Philip Danforth Armour, August Cargill, J. P. Getty, J. P. Morgan, Gustavus Franklin Swift, and many other masters of markets add to the evidence.

There is only the trend, and the Trend, and the TREND!

Wayne N. Krautkramer onlypill@cox.net

Stock Market:http://www.turtletrader.com/trader-schwartz.html

Ray Dirks:http://www.buyandhold.com/bh/en/education/history/2004/ray_dirks.html

Leo Melamed:http://www.leomelamed.com/Speeches/85-scpgt.htm

Leo Melamed:http://www.leomelamed.com/Speeches/69-love.htm

Legislatures:www.galmarley.com see article why state meddling fails

 

August 28, 2004
with
Gale Bullock, David Gobel, Wayne Krautkramer, Alan Lunt, Sol Palha,
George Paulos, Peter Spina, and John Tyler

Contrarian Round Table contributors discuss the topic:

"MARKET MANIPULATION: IS IT A GOOD THING, A BAD THING,
OR IS IT INCONSEQUENTIAL?"


http://www.financialsense.com/fsu/editorials/2004/contrarian/August.html

A MUST READ!!!!!

 

 

 

 

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