Specialists: Test your Knowledge About Them And How They Act In The Market Place To those many investors who have read my articles on both this website and others I have written a test so that you can exercise your knowledge and skills. This test will allow you to see first hand if you have the necessary understanding of my low risk system for investing. The best way to take this test is to print out the entire document and then circle your answers as you move through the printed material. The first set of exercises is designed to reinforce the investor’s understanding of my theory’s and ideas. The questions will proceed from the very simple to the more
complex. Thus we begin in Session 1 with easy-to-understand True – False questions. We next proceed to multiple-choice questions, which have been divided into Sessions 2,3, and 4. In some cases there is more than one correct answer. The investor should select the best possible answer. An answer sheet will follow each section. This will allow the investor to make sure he or she is on the right course before proceeding to more complex problems. I am confident that any investor who carefully works his way through this test material will come away with a much greater facility for applying my ideas of successful stock market investing.
Section 1 Each of the following statements is either true or false. Mark T for true, F for false. Check your answers against the correct answers at the end of this section.
1) Specialists know the markets major major trends a long time in advance. (T or F or F) 2) The single most important determinate of what constitutes a good investment is good earnings. (T (T or F or F)
3) A careful analysis of a single stock can give the investor an indication of the trend of the market. (T (T or F or F)
4) What has happened in the market in the past has very little to do with what happens in the market today. (T or F or F)
5) The market declines from retail to wholesale price levels as a consequence of public selling. (T or F or F)
6) As a trader or investor, the best way for you to succeed in the market is to follow the transactions of specialists. (T or F or F)
7) The Dow Jones average is the barometer investors should follow because it provides them with an excellent indication indication of the trend of the broader markets. (T or F or F)
8) The stocks in the Dow are no longer a true representative of industry as a whole. The movements of the the Average are, therefore, therefore, of no consequence. (T or F or F)
9) The Dow can establish new highs despite the fact that most stocks in the Dow have been moving lower lower for months. (T or F or F)
10)
It’s more important to watch the price and volume movements of the five most active stocks in the Dow than than it is the Dow itself. ( T or F or F)
11)
One of the constructive features of owning Dow stocks is the probability that, in the course of a bull market, most Dow stocks will be among those that are the first to advance and the last to to decline. (T or F or F).
12)
On of the good features of Dow stocks is that they provide more certain growth and better income than most other stocks. (T or F or F)
13)
Different investors should have different portfolios. Some should have portfolios oriented toward growth, others toward income. (T or F or F)
14)
So long as the income from your portfolio remains unchanged, it is of little consequence what happens to the stock prices of an income-oriented portfolio. (T or F or F)
15) 16)
Institutional transactions play a major role in determining a stocks trend. (T or F or F)
Heavy institutional buying is a major reason stock price’s advanced in the first half of 2007. (T (T or F or F)
17)
Heavy institutional selling is a major cause of the volatility that has existed in the market place since the beginning of the 1960’s. (T or F or F)
18)
Institutions tend to perform much better in the market than the average individual because they can afford to pay big fees for investment advice. (T or F or F)
19)
Because they by in big blocks, the costs of purchasing and selling stocks are much lower for institutions. (T or F or F)
20)
The trust departments of banks like Chase Bank have lost billions of dollars in 2007 for investors who utilized their services. (T or F or F)
21)
The stock markets most important function is as a major major source of equity capital. (T
or F or F)
22)
The Exchange Act of 1934 was responsible for instituting major reforms of the stock exchange. (T (T or F or F)
23) 24)
Specialists are allowed to keep the specifics of all their transactions secret. (T or F or F)
The investor can only obtain two-month-old data on specialist short sales from the SEC. (T (T or F or F)
25)
The 1963 Special Study Report of the SEC maintained that the specialist’s short sale transactions in specific stocks should be made public knowledge. (T or F or F) Answers to questions in Section 1 01) T 07) F 13) F 19) F
02) F 08) F 14) F 20) T
03) T 09) T 15) F 21) F
04) F 10) T 16) F 22) F 25) T
05) F 11) T 17) F 23) T
06) T 12) T 18) F 24) T
Section 2 The following multiple-choice questions are designed to reinforce the investor’s understanding of concepts relating to portfolio selection. Always choose the best answer and then check your selections against the answers at the end of this section. 1) The individu individual al with with $25,000 $25,000 to invest invest should should select select a portf portfolio olio of
a) No more more than than three stocks and no less than two. two. b) Thre Three e stoc stocks ks.. c) No more more than than four and and no less less than than three three stocks. stocks. 2) In pursuing a policy geared to the preservation of capital, an investor with $20,000 to $200,000 should select a portfolio of no less than four and no more than five or six stocks, which of the following sets of four would qualify for inclusion
d) e) f) g)
IBM, Kohl’s Kohl’s Corporati Corporation, on, General General Motors, Motors, Bristol Bristol Myers Myers Squibb. Squibb. IBM, General General Motors, Motors, Eastman Eastman Kodak, Kodak, Coca-Col Coca-Cola. a. Procter & Gamble, Gamble, General Motors, Eastman Eastman Kodak, Kodak, Sears Holdings. Holdings. General Motors, Motors, Anadarko, Anadarko, Coca-col Coca-cola, a, Kohl’s Kohl’s Corporation Corporation..
3) Investment Investment advisory advisory services services supervising supervising portfoli portfolios os should be viewed viewed skeptically skeptically when their their advertisements include any but one of the following statements about their operating techniques. Choose the exception:
a) b) c) d)
We coordinate coordinate our investm investment ent strategie strategies s with client client objectiv objectives. es. We constantly constantly monitor monitor the economy economy and capital capital market. market. We determine determine investment investment strategi strategies es based on analysis analysis of Exchange Exchange insider insider activities. activities. We utilize utilize fundame fundamental ntal as as well as technical technical analysis. analysis.
4) The special special fees paid paid to the Exchange Exchange by institution institutions s to execute their their big block block trades have have run as high as:
a) b) c) d)
10 times times the minim minimum um commis commissio sion n rate. rate. 29 times times the minim minimum um commis commissio sion n rate. rate. 19 times times the the minimu minimum m commissi commission on rate. rate. 50 times times the minim minimum um commis commissio sion n rate. rate.
5) It is a good policy policy to select the the stocks most most favored favored by institution institutions s for one’s portfol portfolio io because: because:
a) b) c) d)
Continuing Continuing instituti institutional onal demand demand for stock will will keep their their stock prices prices up. The companies companies they invest invest in are are here to stay. stay. Exchange Exchange insiders insiders have a greater greater incentive incentive to to advance these these stock’s stock’s prices. prices. They provide provide a bette betterr incom income. e.
6) Another Another good feature feature of buying buying Dow Dow stocks stocks is that if if they decline decline in in price, price, chances chances are:
a) Their dividends dividends will will remain remain relativ relatively ely unchanged unchanged.. b) They will will ultimately ultimately advance advance again again in price once the the new bull market market gets underway. underway. c) They will will not not stay stay down down for long. long. 7) In order to buy and sell sell big blocks blocks of the best high-qual high-quality ity stocks stocks at optimum optimum price levels, levels, institu institutiona tionall portfolio managers:
a) Try to establish establish good relationsh relationships ips with with Stock Exchange Exchange insiders. insiders. b) Do extensive extensive research research to determine determine which which companies companies have the best best management management teams. c) Pay insi inside ders rs lar large ge fee fees. s. d) Try to select select the stocks stocks with with the best best future future earnings. earnings.
8) Many institut institutions ions customaril customarily y trade in big blocks blocks that are are transacted transacted off of the floor floor of the Stock exchange. They, therefore, by-pass the specialist in that they conduct their business with large-block positioning firms such as Merrill Lynch and Goldman Sachs. These big block houses:
a) Set the prices prices of their their stocks independen independently tly of the price price established established by the Exchange Exchange specialist in the stock. b) Save the the institut institution ion commissi commissions ons and special special fees. fees. c) Compete Compete with the the specialist specialist in in the ability ability to to set prices prices of stocks. stocks. d) Conform Conform to the approximate approximate price price level establish established ed by the specialist specialist when when they cross their blocks. 9) Instituti Institutions ons prefer prefer stocks stocks like General General Motors Motors and and Microsoft Microsoft because: because:
a) They know know it is is easier easier to sell sell these these stocks stocks to the the public. public. b) These stocks stocks protect protect the reputation reputation of the the portfolio portfolio manager manager by providing providing a built-in built-in cushion against possible losses. c) They like like to invest invest in in stocks stocks other portfolio portfolio managers managers prefer. prefer. d) These stocks stocks are the the leaders leaders in their industries. industries. 10) A major reason bank-managed bank-managed portfolios have poor performance performance records is because the managers managers of these portfolios:
a) Tend to look look for for growth growth situa situatio tions. ns. b) Base their their decisions decisions on corporate corporate fundame fundamentals, ntals, such as earnings. earnings. c) Can’t sell their stocks without without depressing depressing the market. market. Answers to questions in Section 2 01) C 06) B
02) C 07) C
03) C 08) D
04) B 09) B
05) C 10) B
Section 3 The following multiple-choice questions and answers were designed to strengthen the investor’s understanding of the principles concerning the specialist’s role and function in the market place. Always select the best answer and then check your choices against the answers at the end of this session. 1) According According to the the SEC’s SEC’s Special Special Study Report Report of 1963:
a) Specialists Specialists should should be commended commended for the manner manner in which which they stabilized stabilized the the market during the bear market of 1962. b) Specialists Specialists are at the the heart of the problem problem of organizat organization, ion, management management,, and disciplinary procedures of the Exchange. c) Too much much is is expect expected ed of Spec Special ialist ists. s. 2) To become become a specia specialist list the best best course course of action action to take take is to:
a) b) c) d)
Be the the son or or daught daughter er of a spec special ialist ist.. Learn how to to handle the the job through through long long years of working working with with specialist specialists. s. Pass a specia speciall examina examinatio tion n for specia specialis lists. ts. Have enough enough capital capital to become a speciali specialist. st.
3) The aver average age spec special ialist ist cont control rols s as few as:
a) 3 stock stocks s and and as man many y as 10. 10. b) 10 sto stocks cks and and as many many as 45. c) 5 stock stocks s and and as man many y as 30. 30.
4) The number number of specialists specialists operati operating ng on the floor of the the Stock Exchange Exchange is approxima approximately: tely:
a) 560 b) 380 c) 160 5) Investors Investors can only only succeed succeed in in making making consistent consistent gains gains in the the market market if:
a) They learn to to look at the market market as a merchandisi merchandising ng operation operation controlled controlled by insiders. insiders. b) They do their their homework and and learn which companie companies s are favored favored by institution institutions. s. c) They learn learn what and when when stocks stocks are being being sold sold by Exchange Exchange insiders. insiders. 6) Investors Investors can do better better in the market market by sticking sticking exclusivel exclusively y to stocks in which which specialist specialists: s:
a) Maintain Maintain a small small spread spread between between the bid and ask price. price. b) Have proven to to be more predictabl predictable e in their price price movements movements because because they control control highly active stocks. c) Have more more capital capital to support support their their stocks in in the face face of public public selling. selling. d) Are Are hone honest st.. 7) In the course course of the bear market market from 1990 1990 to 1994 the income income data provided provided on 28 specialis specialistt firms showed that they:
a) Were in desperate desperate need of capital capital to to support their stocks. b) Took multi multimil millio lion-do n-dolla llarr losses. losses. c) Had an income of $1.297 $1.297 billio billion n in one year year alone. alone. 8) In the followin following g list of specialis specialistt activities activities,, which is the the one thing that that is not true?
a) He invests invests for for his family, family, friends, friends, and customer customers. s. b) He will meet with with heads of of companies companies to discuss discuss their their stocks. stocks. c) He will discuss discuss his stock stock with institu institutional tional traders traders in order order to get them to to do business with him. d) He adheres adheres to strict strict Exchange Exchange rules, rules, which prohibit prohibit his showing showing his book book to investment bankers and underwriters. 9) If a speci speciali alist st runs runs short short of of capita capitall he can: can:
a) b) c) d)
Sell Sell stock stock to rais raise e money money.. Borrow Borrow money money from from another another specia specialis list. t. Borrow the money money interest interest free from from the the Federal Federal Reserve. Reserve. Get a loan loan on on his perso personal nal prope property rty..
10) The specialist access access to information information and privileges enjoyed by specialists: specialists:
a) Enables then to better better serve serve their their customers customers and perform perform their their duties. duties. b) In no way interfe interferes res with with their right right to invest invest and trade for for themselves. themselves. c) Enables them to to take greater greater risks risks to support the market. market. 11) In all likelihood, any Exchange reforms such as a central central market or competing competing specialists would provide the investor:
a) With With no additio additional nal benefi benefits. ts. b) With lower lower prices prices when when buying buying and higher higher prices prices when when selling. selling. c) A more more liqu liquid id marke markett for for stocks stocks.. 12) There are no basic differences differences between the practices of specialists in one stock and those of specialists in another stock, since:
a) The financial financial objectives objectives of the two two are always always the the same. same. b) They all have have to observe observe the same same rules and and regulations regulations of of the Stock Stock Exchange. Exchange.
c) They are close closely ly regul regulate ated d by the the SEC. SEC. d) Each specialist specialist tries tries to maintain maintain as fair fair and orderly orderly a market as humanly humanly possible. possible. e) Once they have have sold short at their stock’s stock’s high, high, they are anxious anxious to re-accumula re-accumulate te stock at the bottom. 13) In the course of a rally, rally, if a specialist doesn’t have enough stock in his his trading account to supply investor demand:
a) He will will supply supply itit from his investm investment ent account. account. b) He will buy the the stock from from other investors investors by dropping dropping prices prices to clean out his his book. c) He will will borrow borrow the the stock stock neede needed. d. 14) Specialists know, a long long time in advance, the trend trend of stock prices because:
a) b) c) d) e)
They can guess guess the future future trend trend from the the informatio information n on their their books. They know know what what the demand for stock stock will will be. be. They are better better able able to gauge the the future future of interest interest rates rates than most most investors. investors. They are the ones ones who determi determine ne what the trend trend is going going to be. They have have charts charts that tell them what what the trend will will be. be.
15) The Board of Governors of the Stock Exchange has a broad-based selection selection of businessmen who are are not stockbrokers. As heads of the media and major utilities they:
a) Seek to to protect protect inves investor tor inte interest rests. s. b) Serve their their own interests interests by working working closely closely in support of Stock Stock Exchange Exchange practices practices and policies. c) Feel investors investors would would be better protected protected ifif the public public had greater greater representation representation on the Board. 16) The rules preventing specialists specialists from demoralizing the the market by effecting short short sales at or below the last sale price:
a) b) c) d)
Have Have been been streng strengthe thened ned by by the the SEC. SEC. Have Have exempti exemptions ons allow allowing ing them them to do this. this. Were Were writ written ten by speciali specialists sts.. Protect Protect the invest investor or against against “bear “bear raids.” raids.”
17) The 1963 Special Study Report of the SEC pointed out that that in the past specialists specialists had sold short major blocks of stock from their trading accounts at a stock’s high and then subsequently:
a) Sold short additio additional nal stock in the the course of the the decline decline in order to pull the the market down. b) Bought stock stock from institu institutional tional portfol portfolio io managers managers on payment of a special fee fee to cover their short sales. c) Delivered Delivered over their their personal investm investment ent accounts accounts to their their trading accounts accounts in order order to establish a long-term capital gain. 18) A major reason for the the regulatory problems in the the investment industry is is that:
a) The SEC is not given given enough enough power power to do do their their job properly. properly. b) Members of of the SEC SEC top brass brass cooperate cooperate with with the Stock Stock Exchange Exchange in order to move into top jobs in the securities industry. c) The SEC SEC is is inadequ inadequate ately ly staff staffed. ed. 19) The SEC maintains a tight tight rain over investment advisors advisors and stockbrokers across the country. country. In this same regard, the commission’s regulations c oncerning specialists:
a) Is a major major source of investor investor protection protection and investo investorr confidence? confidence? b) Cont Contai ain n many many loopho loophole les. s.
c) Are even more more stringent stringent than than those governin governing g anyone else else in the the investment investment business. 20) The stock stock market market is:
a) Controlled Controlled by the the forces forces of of supply supply and demand. demand. b) An internal internal operation operation manipulate manipulated d by Stock Exchange Exchange insiders insiders for their their own personal personal profit. c) Contro Controlle lled d by the trend trend of of interes interestt rates. rates. 21) The long-term trend trend of stock prices can be altered altered overnight:
a) Because insider insiders s have accumulated accumulated all all the stock stock that they want. want. b) Because of an important important economi economic c announceme announcement. nt. c) Because Because of “techni “technical cal”” correct correction ions. s. 22) The market market advances advances in response response to:
a) Publ Public ic dema demand nd.. b) Insi Inside derr buyi buying ng.. c) Lower Lower inte interes restt rat rates. es. 23) One of the major factors the investor must contend with is is that when the majority of Dow stocks decline in price:
a) The majority majority of all other listed listed stocks stocks are are also declining. declining. b) The market market is reflectin reflecting g the existence existence of of negative negative economic economic news. news. c) The Dow Dow Average Average can still still be making making new new rally rally highs. highs. Answers to questions in Section 3 01) B 07) C 13) C
02) A 08) D 14) D 19) B
03) B 09) C 15) B 20) B
04) A 10) B 16) B 21) A
05) A 11) A 17) C 22) B
06) B 12) E 18) B 23) C
Section 4 The following multiple-choice questions are designed to test the investor’s ability to recognize the purpose and effect of specialist’s merchandising strategies on stock prices. Always select the best answer and then check your choices against the answers at the end of this section. 1) From the following list, choose the factors that can tell the investor when specialists are covering their short sales and going long. (More (More than one right answer )
a) b) c) d) e)
The informati information on will be be published published in the the Wall Street Street Journal. Journal. The SEC SEC provides provides investors investors with this information. information. There There will will have have been a decli decline ne in stock stock price prices. s. There will will be an increase increase in Dow Dow and NYSE volume. There will will be heavy heavy big block block activity activity followin following g the decline. decline.
2) Once the the specialist specialist has has sold his investm investment ent account account at a rally rally high, he will will then then want to: to:
a) Establ Establish ish a majo majorr short short positi position. on. b) Clear out his book so so that he can acquire acquire the stock stock needed needed to go higher. higher. c) Move as soon soon as possible possible to wholesale wholesale price price levels levels in order to to re-accumulate re-accumulate a new new investment account for himself. 3) The main main purpos purpose e of the short short sales is that that it: it:
a) Provides Provides investors investors with with a chance chance to profit profit in a down down market. market. b) Enables specialists specialists to control control stock prices. c) Enables specialists specialists to to profit profit in a declini declining ng market market place. place. 4) The sharp sharp increase increase in volume volume that took took place place in the Dow Dow at the end of of September September 2007 2007 was in direct direct response to:
a) b) c) d) e)
Publ Public ic dema demand nd.. The facts facts that that stock stock prices prices were were raised raised dramatica dramatically. lly. Inve Invest stor or opti optimi mism sm.. Individual Individual economic economic factors factors signaling signaling an an economic economic upturn. upturn. The loweri lowering ng inte interest rest rates. rates.
5) When stock stock prices prices advance advance after after heavy heavy volume volume on the downside downside it is is because: because:
a) Specialists Specialists want want to unload invento inventory ry before taking taking stock prices prices to lower lower price levels. levels. b) There was a great deal deal of public public short covering covering,, which caused caused prices prices to advance. advance. c) Institution Institutional al buyers took took advantage advantage of the decline decline in prices prices to accumulate accumulate stock stock at bargain prices. 6) Changes Changes in the price price of a stock are a reflection reflection of:
a) b) c) d)
A change change in in the the public public supply-de supply-demand mand factors. factors. A chang change e in economi economic c facto factors. rs. A change change in in the the specialist specialists s inventory inventory objectives. objectives. A cha chang nge e in in tren trend. d.
7) Heavy Heavy volume volume on the the downsi downside de indica indicates tes that that::
a) Market conditions conditions are deterioratin deteriorating g rapidly. rapidly. b) Market conditi conditions ons are being being influenced influenced by by negative negative economic economic factors. factors. c) A reversal reversal in in stock stock prices prices is in in the offin offing. g. 8) When speciali specialists sts want to to merchandise merchandise their their stock, stock, one of the the things things they have to to do is:
a) Create Create deman demand d for for their their stock. stock. b) Conduct a sale sale by lowering lowering their stocks prices. c) Conduct a sale sale by raising raising their stock prices sharply. sharply. 9) When there there is a sharp decline decline in stock prices, prices, speciali specialists sts do all of the followi following ng except: except:
a) b) c) d)
Clear Clear out out their their books books of stoc stock. k. Cover Cover thei theirr short short sale sales. s. Accu Accumu mula late te stoc stock. k. Take Take big big loss losses es..
10) The significance of a decline decline in Dow volume as stock prices decline is:
a) An indica indicatio tion n of underlyi underlying ng strengt strength. h. b) That stock prices will continue continue going going lower. lower. c) That the specialist specialist has has covered covered his his short short sales. sales. 11) To indicate a temporary reversal, Dow volume should exceed:
a) 1.8 1.8 bill billio ion n shares shares a day. day. b) 2.5 2.5 bill billio ion n shares shares a day. day. c) 3.0 3.0 bill billio ion n shar shares es a day. day. 12) Specialists short covering and accumulation for a major reversal could be indicated indicated by three to four or more consecutive day’s of Dow volume in excess of:
a) 1.8 1.8 bil billilion on shar shares. es. b) 3.0 3.0 bil billilion on shar shares. es. c) 3.8 3.8 bil billilion on shar shares. es. 13) An increase increase in volume after a run-up run-up in price:
a) Indicates Indicates underlying underlying strength strength caused caused by investor investor demand. demand. b) Indicat Indicates es special specialist ist short short sellin selling. g. c) Is a consequence consequence of of good good corporate corporate or economic economic news? 14) The specialist is aware aware of how the public conforms conforms to certain behavior patterns. patterns. Hence, if he is raising prices from 70 to 100, he will:
a) Distribute Distribute big big block block at just above the the 100 levels. b) Distribute Distribute big big block block just just below below the the 100 levels. levels. c) Examine Examine his book to to see whether whether there are more buy buy orders or sell sell orders orders above the the 100 levels. 15) If very big blocks appear at the 59 price level and still more at the the 60 level after a sharp sharp advance from the 25 price level, it is an indication:
a) The stock stock is going going higher. higher. b) The stoc stock k is being being set set up for for a declin decline. e. c) Institution Institutional al interest interest is coming coming into the stock. 16) The appearance of big blocks at the 20 price level after after a sharp decline from the 50 price level is:
a) A bullish bullish signal suggesting suggesting the stock stock could could make a good good trading trading vehicle. vehicle. b) Bear earish. c) A signal signal the the stock stock shou should ld be sold sold short short.. 17) When a stock declines from the 90 level, touched the the 60 level on high volume, and then after proceeding to 59, advances to 70 and declines once more to the 60 level on light volume, chances are:
a) It will will bounce bounce off off the the 60 leve levels. ls. b) It will will go down down throu through gh the the 60 level levels. s. c) It will will test test the the 59 leve levels ls again. again. 18) Chances are that, if there are a lot more sell sell orders at 60 than buy buy orders, a specialist who who has advanced his stock from the 30 price level to 59 will do the following:
a) Advance it just just above 60 to collect collect the the sell orders orders and then proceed proceed higher to to unload them. b) Open his his stock above the the 60 levels levels to to avoid avoid the sell sell orders. orders. c) Advance Advance his his stock stock no no higher higher than than 59 7/8. 7/8. Answers to questions in section 4 01) CDE 07) C 13) B
02) A 08) C 14) C
03) B 09) D 15) B
04) B 10) B 16) A
05) A 11) A 17) B
06) C 12) B 18) C
A final note to the investors who took this test and did poorly on answering the questions. Don’t despair, go back to the informational tabs on my website and re-read the individual articles listed on the site. All of the information necessary for you to answer these questions properly is contained within those articles. Remember, the more information you can acquire and retain in memory on how specialists and their system manipulate the market place and individual stocks,
the better your chances are of making substantial profits in the market place by pig-backing their movements. Richard W. Wendling 12/25/07
[email protected] [email protected]
