The Fix Is Still In

07/19/2011 7:30 am EST

Focus: MARKETS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

The government is still helping the big banks, whether they call it QE3 or anything else, and individual investors should know, comments Jack Adamo of Insiders Plus.

The three major indices rose an average 0.8% in the first full week of July. Despite the seven lean weeks and one fat one (Hmmm, just the opposite of the Bible!), the market still seems to have enough momentum to keep going.

However, I’m not sure what the source of that momentum is. Friday’s jobs report was horrendous, and the market took a bad hit right at the open. It stayed down all day until the last hour when buying came in to knock the Dow’s loss out of the glaring triple-digit range.

Was this due to professional traders responding to the fact that stocks didn’t fall lower throughout the day? Or was it The Working Group On Financial Markets (the Plunge Protection Team, PPT) coming to the rescue to prop up market confidence in hopes of preventing a return to slumping stock prices?

Unfortunately, the likes of us will never know. You have to be a top-level guy at Goldman Sachs (GS) or JPMorgan Chase (JPM) to know that, or someone high in the Fed or Treasury.

What we do know is that through the PPT, the government is allowed to buy securities in the open market and pays the major investment banks to “provide liquidity” for such trades. In other words, we pay Wall Street to trade against us.

Efforts to separate “proprietary” trading desks from banks that take federally insured deposits are not making much progress. Until that happens, if ever, it is perfectly legal for these companies to trade against their own clients and other market participants, even using the Treasury’s money.

That includes accumulating a position in a stock, then issuing a Strong Buy recommendation and selling their stock into the rising demand the recommendation caused. Think about that the next time you read a broker’s recommendation.

As is often the case, tech stocks have led this rally most of the last two years. (Commodity-sensitive and financials have also taken turns.) Tech guru Fred Hickey has been warning lately of signs of weakness in the tech sector, yet the tech sector took a nice bounce in the last couple of weeks.

These bounces tend to happen during “rumor season,” when no earnings reports are coming out, and it’s easy for traders to drive up prices with a rumor or bullish forecast in some media outlet.

But “warnings season” comes next. If we start hearing tech companies lowering their Q2 forecasts, watch out below.

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