Telltale Signs a Significant US Market Correction Won’t Happen in the Immediate Future

June 2nd, 2009

As has been the case for a while now, in regard to financial stories reported in the media, a breaking story is reported that is often followed by a completely contradictory story just several weeks later. The latest example of this is the following. On May 6, Friedman, Billings, Ramsey Group analyst Paul Miller stated that J.P. Morgan Chase & Co. (JPM) “would probably be the only one of the 12 commercial banks submitting to the stress tests that won’t need more capital.” Several weeks later, on June 1st, J.P. Morgan Chase (JPM) announced that it planned to raise $5 billion in a secondary offering. Other large financial institutions, such as American Express (AXP) and Prudential Financial (PRU) also announced respective secondary offerings of $1.25 billion and $500 million.

In my May 12th article, “US Bank Shares: The Pump is Almost Over, Get Ready for the Dump”, I noted the “urgency of many financial institutions to complete their secondary public offerings of stock and debt as soon as possible.” However, given that one of the biggest beneficiaries of this crisis, JP Morgan, has just announced a secondary offering that may not be completed until the end of June, we can now be assured that the markets will not experience an extended correction until JP Morgan has completed its secondary offering. Thus for now, we can expect this US market rally to continue or at least to channel up and down for a little while longer without an extended downturn until JP Morgan and other large financial institutions have completed their secondary offerings. While volatile trading days over the next couple weeks is not out of the question, and even likely, I believe that the volatility will remain range bound in the very short-term. Since JP Morgan just announced its intentions to raise capital yesterday, it is highly unlikely that we will see a strong, sustained downward trend in US markets commence for at least another couple of weeks if not a couple more months. However, other important “triggers” in the international world outside of the US will determine if we see this sustained downward trend in a couple of weeks versus a couple more months.

The US stock market is a vastly different creature from the US economy, and due to massive government intervention, the US stock market can continue to rise for extended periods of time even while the fundamentals of the economy continue to deteriorate. There is no experienced, diligent observer of US stock market behavior that will deny the existence of huge anomalies in market behavior in recent weeks that point to massive intervention. Just consider the video below where the commentator notes that during one recent trading day, an estimated $10 to $20 billion entered the US markets and traded S&P futures contracts to prop up general US market indexes during the last 7 minutes of the trading session. In response to this massive injection of capital in the last 7 minutes of market trading, the analyst states, “Who has that kind of money to move the market?” The answer, of course, is the Plunge Protection Team.

I, myself, in carefully monitoring US stock market behavior in recent weeks, have seen these same massive anomalies indicative of market intervention specifically in the trading behavior of many large US financial stocks. Though the bottom title in this video states, “Is the Rally Over?”, there is little doubt and should be little argument over the fact that the US Federal Reserve and the US government will not allow the rally to end until their favored financial institutions have had adequate time to complete their secondary offerings at artificially propped-up share prices. Do I still believe a very large correction is inevitable in the future? Of course. And when it happens, it will most likely be a very drastic event. But certainly, the Plunge Protection Team will not allow the downturn to commence until after all large US financial institutions have had a chance to complete their secondary offerings.

Entry Filed under: Financial Crisis, Dollar Crisis, & Recession Proof