Daniel Shaffer

The S&P Strong Hand

5/27/2009 1:30 PM EDT

I have been getting many inquiries about what I said on Fox Business on May 14. In fact, the video of the segment is appearing on the Internet in various venues.

Here is the transcript of my comments during that segment:

Something strange happened during the last seven or eight weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures. I watch the futures every day and every tick, and a tremendous amount of volume came in a several points during the last few weeks, when the market was just about ready to break, and it shot right up again. Usually toward the end of the day — it happened a week ago Friday, at seven minutes to 4:00, almost 100,000 S&P futures contracts were traded, and then in the last five minutes, up to 4:00, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44, or 50 points in seven minutes. That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issued secondaries — they issued stock — they raised capital into this rally. It was perfect textbook setup of controlling the markets, now that the stock has been issued.

I observed last Friday before the Memorial Day weekend that this bid was in until about 3:20 p.m. EDT, where it disappeared and the market sold off into the close. Today, I see the same pattern as Friday — every time the S&P futures try to drop, a strong hand comes in and holds them up. The market also gets very quiet and it seems like I’m watching paint dry while the bid is in there.

My calculations are predicting that this bid may disappear sometime this afternoon or tomorrow, because either they have met their quota for the month or they may unwind their longs before the end of the month. This may take the market down into Friday’s end-of-the-month close.

It does not appear to be computerized or algorithms trading based on the price action we have studied. Something is holding up the bid. Once this bid pulls back, we believe there is a high probability that the market may again test the 878.94 level in the SPX, which would be the fourth recent time. We also believe that there is a high probability to break this technical level shortly.