I’m a free markets guy.  I believe in the power of millions of transactions from millions of parties to drive the direction of an economy or in the case of the stock market, the valuations of America’s companies.  I’m struggling these days because I’m finding myself not trusting the stock market.  The ideas of manipulation, corruption, high frequency trading, Fed intervention, etc. are all in my mind these days.

A recent Yahoo Tech Ticker post discussed what they called a “zombie market”.  The post describes a market driven higher by very light volume, moved during the pre-market and at the end of the session each day with little movement in between 10am and 330pm.  I’ve definitely noticed this, and so has Mark over at Fundmymutualfund.com who has discussed this at great length over the previous months.

Other conspiracy theorists claim that the market is key to overall sentiment regarding the economy (which it pretty much is) and therefore, the government can prop up the economy by propping up the stock market – individuals feel more wealthy since their portfolios are higher in value, therefore, they go spend money and help the economy. It’s undeniable that higher stock prices in 2009 helped re-capitalize banks and REITs and other companies who were able to take advantage of higher stock prices and sell stock.

Surely a high stock market also boosts re-election chances for incumbents in the political arena as well.

Am I going to go so far as to say that this market is a sham?  No, but I’m definitely less trusting of the market.  With that said, a long term perspective will likely work out fine as true values of real companies will become evident and stocks will move towards that over a long enough time frame. But, what about the next couple years?  If it is a sham, investors buying stocks today will likely get slaughtered.

So, what’s the point?  I guess the point is to proceed with caution.  Capital preservation should still be goal #1 especially with serious fundamental issues with this economy.  While I’ve missed out on the rally holding a significant percentage of my portfolio in cash, it is definitely something I’m comfortable with.

I have the following questions/concerns with the market:

• How much of the daily volume is made up by computers?
• How many traders buying stocks have one foot out the door already?
• Why is volume so much higher on corrections versus the days/weeks when we rally?

And, of course, I have massive questions with the economy which I talk about all the time.  If I’m right on the economy, eventually stocks will correct to more closely resemble what I believe the economic realities are.  If I’m wrong, the economy will move to more closer resemble to where stocks are currently.  We shall see…