Friday, October 14, 2011

Fighting the Invisible Hand and the Plunge Protection Team

In my last post of 10/4, I stated buyers would need to step in that day to avert a crash. Boy, did they ever. The 1100 level on the SPX was breached and took us to the 1075 area when Ben Bernanke and the Plunge Protection Team rode to the rescue with reassuring comments that traders ate up with knife and fork.

This is a fairly common occurrence and one you have to account for when you attempt to trade from the short side. It's yet another reason why it is FAR easier to trade bull markets. When you go short in bear markets, you not only have to fight the faster pace of trading and volatility (since fear is stronger than greed) but also the Invisible Hand of the PPT.

Although no governmental official will ever acknowledge intervention in the stock market and it sounds like some grand, kooky conspiracy theory, traders have known about the PPT and the President's Working Group on Financial Markets for years.

Government has a vested interest in preventing market crashes and averting chaotic market conditions for obvious reasons. No incumbent wants to witness a market crash on their watch. It naturally decreases his chance of re-election. Nor does the Federal Reserve since its members are political appointees.

Economies, markets, banking systems, governments and currencies are all confidence games in essence. Once confidence is broken in any, panic ensues. Panic is the ultimate doomsday scenario for all of the above entities and some form of intervention WILL occur. Whether it be Fed injections, governmental bailouts, or reassuring words or outright lies from officials (to wit, think Hank Paulson and Ben Bernanke denying the Housing Bubble), some Hail Mary pass will be attempted to assuage the public that things will turn out just fine.

Market interventions are historically rare but more common of late with the manifold problems the world faces. Please do not take this to mean there are PPT injections into the market on a daily basis. But the PPT uses interventions as a brake on chaotic selling and preventing crashes at strategic technical moments.

If I could see that a significant close below 1100 on the S&P would spur a crash, then so can the PPT. It is why I said in my last post that the trading day of 10/4/11 was THE day of importance but also threw in the caveat that there might be one desperate attempt to keep the SPX above 1100.

One could rant and rave about how wrong and anti-free markets this is, and they would be right. However, it is a given. If you attempt to make money by trading the short side, expect a well-timed intervention when things are at their bleakest and act accordingly.

As a cautionary tale, Ben Bernanke roasted me badly on 8/16/2007. I had predicted the economic debacle for quite a while and determined that the moment of reckoning had come technically. I bought about $5,000 in cheap, out-of-the-money puts and the market fell dramatically but orderly. My puts within a few days had increased to $25,000. I sold about 1/4 to at least lock in a small profit in a worst-case scenario but let the rest ride as a crash was imminent and a life-changing opportunity was coming.

On that fateful morning, the futures were down massively. The most I had ever seen. The Nikkei was down almost 900 points and when the markets opened within minutes we were down 45 handles on the SPX. My puts went up exponentially that morning alone and I was literally planning an early retirement. It was options expiration as well.

Within a half-hour of the opening of trading, after more shorts had been brought in by the technical break, Ben Bernanke announced a liquidity injection causing the mother of all bear traps and short-covering rallies. The SPX rallied 30 handles in moments and ended higher on the day. The market was saved from a crash for a short while seemingly out of the blue. My early retirement was now just a measly $2,000 profit. Let's just say I was not happy with Chairman Bernanke and the PPT that day.

(Pardon my language in that link, by the way. It was not my finest hour as a human being, but the purpose of this blog is to show you the nitty-gritty of trading and I have to be transparent to build an intellectually valid trust with my readers. A member of that message board had accused those of us who were short of being ghoulish profiteers and I unloaded on him.)

The PPT knew the importance of that day. They knew by giving the market some crack on options expiration that they could cause a bear trap of epic proportions and lift the markets higher. It was my rude awakening into the ways of the PPT. I vowed from that moment forward I would never allow the PPT to burn me again and whenever I am short, I am always aware that the Invisible Hand is out there ready to guide the market where it wants it to go. It was an expensive lesson that I hope you don't have to learn. It also was the day I learned slow, steady gains and disciplined trading was the right path to follow.


  1. The Plunge Protection team...puts me in mind of some sort of drastic remedy of last resort for horrendous toilet cloggings...

    Free market, may arse.

    Thank you, once again, for exposing one cog of the Big Lie.

  2. so did you close out your shorts? I am buying this rally, we bust through 1220 next week. AAPL looks great.

  3. Also, did you hear about the Zweig Breadth Thrust bull market signal. Check my blog for more info.

  4. Howdy Max, shorts were closed when we went back above 1100. Awesome if you caught some of this rally! I'm sitting on my hands for now. Will be a believer if we break above the 1260ish neckline from the H&S top from a few months ago.

  5. Thanks Scipio! It really is a rigged system on so many levels.

  6. nice job, hope you made some good coin. I actually bought some xle at 56 and 60 and aapl at 363, so i'm happy. Sold my XLE on Friday for a nice 11% gain.

    I think the PPT is like Keyser Soze for shorts.