Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

How High Can the Stock Markets Go?

Stock-Markets / US Stock Markets Jun 06, 2007 - 09:57 AM GMT

By: Paul_Petillo


Not so long ago a triple point gain, like the one that occurred last Wednesday or a similarly sized loss, a healthy correction that hasn't happened in far too long was serious news indeed. The math suggests why. A 100 gain/loss when the Dow was at 8000 represented a 1.25% move whereas a similar gain in the 13,000 point range coughs up half as much of a move but twice the chatter. 

With the Dow setting new daily records and the S&P 500 now in the same territory, one wonders what kind of news will move traders do change course. What economic tidbit will convince them to pile in with ever greater abandon or take their money and head for the exits? 

It seems as though nowadays, market-moving news is almost a non-event.

Yet, there are some interesting contrasts at work in today's marketplace. 

Liquidity is very much at play in the stock market. And not the kind of liquidity that allows all investors to jump in with the same advantage as the institutional big boys and girls.

No, this liquidity has an entirely different ring to it. Long time readers of this column will already know how I feel about stock buybacks, the single most disruptive force at play in the markets today.

For those who have not been following this trend and the S.E.C. seems to be among those who either are unaware or who have chosen to look the other way, buybacks work like this. Companies give guidance to analysts. Analysts determine a target price for the stock depending on where the equity is at the moment and where it might go in the future.

Investors, mostly the institutional types take the info and buy or sell the stock accordingly. But should those companies miss that number for one reason or another, the analysts gets skewered, the stock drops and the company is left explaining what went wrong.

But suppose the company has some cash in the coffers (we'll assume the reason may be just as simple as having a good year profit-wise). Suppose that company, understanding the simple math of price/earnings ratios – an equation that take the stock price and multiplies it by the total number of shares available at any one time to purchase, decides to use the cash to buy back some of those shares.

The stock doesn't go away but it is no longer available to the investor for purchase. In other words, the liquidity of the stock has just been diminished. 

There are numerous scenarios a company can pursue with those missing shares but the move has a net result: an increase in the share price the next time the P/E calculation is done.

This leaves two investors on the short end of the equation: the investor who may be eyeing the company as a potential investment and the investors who are already in it. The potential shareholders are looking at a stock whose price is now artificially inflated. The shareholder, who is the technical owner of the company, will not receive the portion of the profits they rightly deserve.

The second half of the liquidity problem comes from overseas. The foreign investor, flush with cash from trade deficits, oil prices, and outsized growth has few places in which to invest. Pouring money into a market that rises on whatever news, good or bad, weak or poor is simply a problem of choice. 

Henry Paulson, the US Treasury Secretary, who has been attempting to loosen the regulations at play in the US markets, should take note. There are few places to go other than Wall Street with huge amounts of cash.

For now. If and when bond yields head towards 5% and that possibility looks very real, this whole scenario might unravel. As the Fed waffles on its economic stance – housing is bad one day and not so bad on another; inflation is contained but not as much as the bankers would like; the economy is weak but may not be for long or may be weaker than anticipated, the markets rise. They may start out weak but have rarely ended so.

With so many cheerleaders, so many companies involved in these types of legal stock price manipulations, and so little reliable news, the market will go higher. Tomorrow and the next day.


By Paul Petillo
Managing Editor

Paul Petillo is the Managing Editor of the and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via:

Paul Petillo Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules