Since the beginning of November, major market indices have been trading in a narrow, sideways channel. Over the past week or so, there have been indications that stocks are breaking out of the pattern and advancing.

Below is a chart that shows price movement of the Dow (DJIA), the Nasdaq, the S&P 500 and the New York Stock Exchange composite (NYSE) over the past three months. You can see that with the exception of the Nasdaq, these indices didn’t really break out to new yearly highs until the end of December. However, the past few trading sessions they have been unable to add to the advances and appear to be trading in a sideways pattern again.

Until stocks can sustain an upward break out, the situation for conservative investors is quite risky. This has already been a fairly prolonged sideways trading range and we should not have to wait too much longer to see which way the market will go when a new trend develops.

One expert says government is manipulating stock prices

In the early 1990s, a former money manager for Strategis Financial Group frequently alleged that the stock market was manipulated by the government. The group responsible was nicknamed the Plunge Protection Team (PPT). The PPT was supposedly put in place by Ronald Reagan after the 1987 stock crash to prevent future meltdowns.

Although there has never been any acknowledgement that the PPT exists, the rumor persists. The possibility of a PPT was raised again this week by a credible source. In a special report, Charles Biderman, chief executive of TrimTabs Investment Research, reported that secret government moves might be partially responsible for driving up stock prices in 2009.

TrimTabs is a research firm that has tracked liquidity flows into the markets since 1995. According to the company’s web site, “TrimTabs Investment Research is the leading independent institutional research firm focused on equity market liquidity. Our key premise is that stock prices are a function of liquidity rather than value. Like the prices of any tradable good, the prices of stocks are driven by supply and demand.”

In a statement Tuesday, Biderman said TrimTabs has been unable to identify the source of the new money that caused stock prices to rally so quickly in 2009. His report said a significant portion of the $6 trillion increase in U.S. stock-market capitalization since March cannot be explained by traditional sources of money flowing into the market such as mutual funds, direct retail investment, pension funds, hedge funds or foreign purchases.

He contends that the logical explanation for the unexplained inflows is secret buying by the government. He also acknowledged that he has no hard evidence of any government purchases.

Many might be skeptical that a secret government plan to buoy stock prices could exist for 30 years without any solid proof. On the other hand, there are plenty of examples of conspiratorial secrets that remain undiscovered for lengthy periods. The Madoff scandal is a familiar recent example.

Obviously there are many well known instances of government intervention in the financial sector. The government has long been the dominant force in fixed income securities—buying and selling Treasury bonds, notes, and mortgage-backed instruments. In the past year it has provided hundreds of billions to assist the banking, insurance and auto industries. So there is certainly precedent for the government protecting its own financial interests.

If the government were bolstering the stock market by buying stocks to prevent a crash there is good reason to keep it quiet. Knowing that the government was ready to step in to prevent a collapse would remove some of the potential risk involved with equity investing. Any time stocks dropped, people would clamor for the government to infuse money. People who should probably not invest in stocks because of the risk might go ahead because of a false sense of security knowing that the government was there to provide a foundation.

Without any hard evidence, discussion about the PPT is purely speculation. But when the head of a company dedicated to tracking market inflows says he cannot account for $600 billion worth of investment infusion, it is worthy of note.
F.S.