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How to Manipulate the Stock Market
With Only $12 Million Per Day

If I ever wanted to manipulate the stock market without being detected and using the smallest sum of money possible, here is what I would do. (Ethics aside) First, I would accept that I could not do the job by buying or selling bulk shares of stock because that would take too much of money and it would not be possible to avoid detection. Therefore, I would try to quietly influence the trading of large sums of money by institutions. The means I would use to mobilize these large sums of traded money would be to manipulate the technical analysis tools that many market participants are using.

We live in times where technical analysis is increasing in importance because as financial bubbles continue to re-inflate, the disparity between fundamentals and share prices widens. All that’s left, as a basis to own stocks is the technical charts. It would be impossible to manipulate company fundamentals or news in a meaningful way without being detected. Therefore I would concentrate my efforts on the technical analysis characteristics of company stocks.

I would attempt to manipulate the technical indicator that had the greatest combination of:

1. Extent that financial institutions and the public used it.

2. Ease by which the indicator could be manipulated.

This would lead me to the Dow Transportation Index. Why? Dow Theory is one of the most widely used of technical theories. (A summary of Dow Theory is below.) It involves establishing the trend of both the Dow Industrial and Transportation indices to establish whether their respective movements confirm each other to establish the primary trend of the stock market. According to Dow Theory, when there is confirmation of the direction of the trend, traders may trade in the direction of that trend. This Theory is a cornerstone of the most widely used textbooks on technical analysis, including those used by the Market Technicians Association to certify their members. Such market technicians are increasingly employed by financial institutions and therefore, have an increasing influence on markets. If enough people study and trade on the technical characteristics of the markets, they become the market. By manipulating the Dow Transportation index, I could keep a large proportion of technical traders on the same side of the market. At the very least, I could create enough Dow Theory confusion to keep many traders and a lot of money out of the market or away from shorting stocks. Could I do this with a relatively small amount of money? Yes! I will describe how. Below are some key statistics on each component of the Dow Transportation Index.

DOW TRANSPORTATION INDEX

My goal would be to manipulate the Transportation index by moving the prices of stocks that had the best combination of share weighting (high is better), and share liquidity (low is better). The Dow Transportation Index is a share-price weighted index. For example, the first company listed, Alexander Baldwin (ALEX) comprises 4.76% of the Dow Transportation Index. Over 20% of the index is comprised of two companies - United Parcel, and Fed Ex. While it may be a good idea to try to manipulate the companies that comprised the largest proportion of the index, it would be more efficient to consider liquidity as well. All other things being equal, I could manipulate the index more efficiently if I could move the prices of those companies that had the least amount of liquidity. It would take fewer shares traded to move those company’s stock prices than the more liquid stocks in the index. For example, I could move Alexander Baldwin, which trades an average of 200,000 shares per day a lot more efficiently than Southwest Airlines, which averages 3.5 million shares per day traded.

In the fourth column of the Table above, I have listed what I will call a “Push Factor” for each company in the Dow Transports. The Push Factor is the percentage weighting in the index divided by the average daily volume traded (times 1million). Combining the companies, which the highest percentage index weighting and lowest liquidity results in the highest “Push Factors”. These are the companies that one can use to most efficiently move the entire index. As you can see from the table above, over 69% (105/152) of the combined Push Factor comes from a total of only 7 stocks. These 7 stocks trade a combined average daily volume of only 2.84 million shares per day. I could therefore account for about 10% of the trading volume of these stocks (containing 69% of the index “Push”) using only about $12 million per day. This would likely be sufficient to manipulate the prices of these stocks and as a result, of the entire index. By contrast only one stock in the Nasdaq index, Intel, trades an average of 57 million shares per day. It would take $161 million to provide the same support to Intel’s share price, as only $12 million would have for all of the 7 double-digit Push Factor Dow Transport stocks. Whereas the 7 stocks have a Push Factor accounting for 69% of the index, Intel makes up less than 5% of the capitalization-weighted Nasdaq index.

As you can see from the discussion above, manipulating the Dow Transportation index would be relatively easy. Moving this index by way of manipulation would have a ripple effect on the large number of traders and investors using Dow theory. It would be pretty efficient market manipulation for only $12 million per day. Since it can be shown that the Dow Transports can be manipulated relatively easily, and given the out performance of the Dow Transports, conspiracy theorists would have to question if that is happening now. Following is a 6-month chart of the Dow Transport to Dow Industrials Ratio. It makes one wonder if something is afoot.

Following is a graph showing the dividend payout percentage of the Dow Transport and Industrials indices from 1987 to the present. If there is something that is driving the transports higher in greater proportion than the overall stock market, it is not declared dividends. The transports, with a current dividend yield just over 1.09%, are anything but historically cheap. The Dow Transports presently trade at a 20-percent premium to the 17-year average dividend yield of 1.31 percent (not including the 1988 high “off the chart” yield).

For what it is worth, the stock with the highest “push factor,” Alexander Baldwin, just announced their latest dividend last week (no increase). 

Today’s Market

All of the major indices were down today on relatively high volume. Amongst all of the rah-rah talk that is ringing in my ears from the cable TV folks, some bearish patterns seem very much intact. The S&P, Dow Industrials, S&P 500, and Nasdaq have just finished making a lower high. Here are 6-month charts:

With volume finally picking up, the indices have made little progress in the heavier trading. While the S&P and Dow Industrials tried to break their respective down trendlines, they seem to have failed and they now sit below their (down) trendlines. Viewed alone and with a bullish point of view, the Nasdaq, appeared to have broken its downward trendline to the upside. But viewed from a bearish perspective, it appears that the Nasdaq has fallen into a new less steep trendline. This new trendline, shown in red in the chart above, corresponds directly with the same time frame as the still valid trendlines of the Dow and S&P. It is notable also that the S&P is showing a clear loss of momentum as shown in the indicators above. Whereas earlier this year any stock seemed to be going up, I’m seeing some pockets of weakness in the market such as the restaurants.

Tired of all this negativity? There are also some pockets of what I think is buyable strength in the stock market that will be featured here next week. Stay tuned!

Gold was up $2.50 ($395.50/ounce), silver up $0.15 ($5.93/ounce), the dollar down, and the 10-year note down (yield 4.56%). No major trend breaks in any of these. Gold and silver stock indices were down a little more than one percent.

Have a great 4^th of July.

Martin Goldberg

Overview of Dow Theory

The first part of the Dow Theory is basic. There are three types of stock market movements. A primary or secular trend which takes place over the course of years. There are secondary or correction movements, which take place from weeks to months. These run contrary to the primary trend. There are day-to-day fluctuations, which can move in either direction (bull or bear), and are of no particular importance (except to day traders). The overall objective of Dow Theory is to determine and invest with the primary trend.

The second part of the Dow Theory is that the Dow Jones Industrial Average and the Transportation Average must corroborate or confirm each other's direction for there to be a reliable market trend. When movements of several weeks or longer take place and are confined to a range of about 5%, this is known as a trading range. According to the Theory, when both averages break out above this range, prices should head higher. When both averages break down below this line, prices should head lower. If one average breaks out and the other doesn't, the move is said to be inconclusive. Such unconfirmed moves in an average are suspect and may be considered false, until confirmed by the other index.

The logic behind the original Dow Theory is that both the industrials and the transports are independent of each other. Yet, for the industrials to get their product to market, they must use the transports. When the industrials are doing well, the transports should also do well. However, when one sector is doing substantially better than the other, a divergence is taking place. This demonstrates that one sector is much stronger than the other; and if it continues, without the other sector catching up, a major reversal in the market will take place. For the confirmation to take place, it isn't necessary for both averages to cross at the same time. However, the one should then follow the other before the first average crossing pulls back across the former trading range.

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