Ever so often I receive e-mails questioning my views on manipulation. The basic question is whether or not I believe in market manipulation. The basic answer is, yes. I believe in what I can see and prove. Inflating the money supply, lowering interest rates, raising interest rates, doctoring up unemployment data as well as inflation data by excluding key items are all obvious forms of manipulation.

Others talk about the Plunge Protection Team (PPT), which allegedly comes into the market and buys futures to "control" the market. This is something that I can't prove or disprove. Therefore, to form an opinion about any manipulative efforts of this degree would not be based on fact. Without a basis of fact, I see this no differently than guessing about UFO's or any other urban legend. It is for that reason that I have to shy away from notions of manipulative efforts of that degree. Hey, this is not to say that it does or doesn't happen. This is only to say I can't prove it either way. Furthermore, I will argue that if it does exist, it will not matter in the long run as all manipulative efforts ultimately do fail.

Now, let's deal with what we do know. One thing that I do know is what the internal strength data is telling me and it does support the liquidity infusion that has obviously been underway. Over the last couple of weeks I have shown you various measures of the internals. The bottom line is that when we look at these internals in relation to the individual intermediate term advances that have made up this entire Secondary Reaction that began at the 2002 Phase I low, we find that each intermediate term advance has been on weaker and weaker internals.

What we also know is that when we look at the internals in this light, we find that they topped in June 2003. We find that the February 2004 intermediate term advance topped with a divergent high on this Advance/Decline line. We also know that in the past, when this happened the market was either at or typically no more than one additional intermediate term cycle away from the 4-year cycle top. But, in this case the market has continued to hold and since January has actually pushed higher with still increasingly weaker internals. The point here is that this has been made possible on the back of the monumental infusion of liquidity, also known as manipulation. It is also this same liquidity infusion that has broken the historical norms on gold and fueled it up in an ongoing unprecedented 6 th intermediate-term cycle up within the current 9-year cycle. So, yes I do believe in manipulation at this level and both the gold and the Advance/Decline data clearly show it.

PPT? We'll see about that when the show down between liquidity and the natural forces of the bear market reappear later this year. Regardless of the degree of manipulation, I believe that the natural forces of the market will ultimately win out. I do not believe that any such efforts can make up for solid buying and that it will ultimately only make matters worse once gravity takes over.

The following text on Manipulation was taken from Robert Rhea's book, The Dow Theory.

"Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

'A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.' (Nov. 29, 1908)

'Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.' (Feb.26, 1909)

'...the market itself is bigger than all the 'pools' and 'insiders' put together.' (May 8, 1922)

'One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, 'Between the Chains,' in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.' (The Stock Market Barometer) '...no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.' (April 27, 1923)

'The average amateur trader believes the stock market is guided in its trends by a certain mysterious 'power,' this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.'

'It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or 'manipulating' the market for a short period. The professional speculator is always ready to help the movement along by 'placing his line' while the little fellow timidly 'lays out' a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the 'technical situation' so dear to the hearts of financial news reporters.'

'Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!'

Yes, it is true that this is not the early 1900's. We also know that today the Fed has more tools available to influence the market as well. But, at the same time the markets are much, much larger than they were in the early 1900's. So, even though the Fed has more tools available, is this fact over ridden by the fact that the market is now many, many times larger than it was then? Personally, I would say yes. Can the Fed actually hold the market up forever and ever and create a period of endless prosperity without the market ever experiencing Phase II or Phase III of the bear market? I guess this remains to be seen, but my view is NO. At some point the poor breadth will override the liquidity factor and the Phase II decline will begin. Once this occurs, the test will then be how successful the damage control efforts of the move into the Phase II low will be. If minimal damage is done, then yes, the manipulative efforts will have been successful and we will all want to be long on the advance that follows. But, if that decline is not contained, then the natural forces will have won out. For now, the Secondary Trend remains positive.

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