Specialists: How They Shade Traditional Thinking Versus Reality By now the reader of these articles is surely aware that most investors are ruined in the market because of their failure to recognize the causes of the market’s trends are due to a succession of concrete and particular events, all of which are linked to one another through the specialist as today is linked to yesterday and tomorrow. Isolated, the various activities of the specialist may make no sense what so ever. Yet systematic knowledge of the market’s historical trends reveals that while the specialist will be profoundly influenced by what happens in the present, what happens in the present or over the short term will be profoundly affected by and runs parallel, so to speak, with his longer term inventory objectives. In other words, if he establishes a downtrend from a high today, he will begin to precipitate public selling tomorrow. The inventory he acquires in the course of this first decline from a high then becomes a permanent element of the rallies which must follow and which he conducts in order to unload his unwanted inventory of stocks. One can make the following generalization generalization about these rallies; that the insider selling and short selling occurring at the rally highs have a specific relationship to the forthcoming declines from rally highs.
Insider selling and short selling are not, however, the only determinate of the extent of the decline. The relationship between public selling and its impact on the specialist’s inventories also determines the extent of the decline from a rally high and the plan of action
that will be taken by specialists to unload this inventory. Inevitably as prices move down from the final highs, the investor’s financial page will be advising him not to abandon faith in the underlying strength of the market. He will be told, “It is only logical
to expect some sort of pullback, or at least a consolidation phase in the market.” The investor’s problem will be rallies in the Dow,
which will attempt to hide the fact that the overall market is declining sharply. On some days the Dow may close sharply higher while the preponderance of declines over advances shows the market as a whole to be still disintegrating. Then, when the Dow continues its plunge past the levels at which investors were advised to look for support, they will be told to look for support at levels that are still lower. Then, when these levels are penetrated, they will be told that the experts expect to find support at the old lows. Then when some or all of their stocks begin to penetrate their old lows, they feel it is then too late to sell. Near the bottom they will hold on until the media grows pessimistic. Then, thinking he should try to save something, investors will sell everything. We have seen that the investor’s disappointments are proportionate to the degree in which his activities unknowingly assist in the development and refinement of the specialist’s practices. When investor’s are buying, on balance, specialists are selling. When investors’s commit themselves to heavy selling, specialists are buying. Thus the public’s bearishness is actually bullish, and its bullishness is, in fact, bearish. It should now be clear that nothing is natural; nothing is, as it seems to be. The movement of stock prices is not the reflection of economic law. The present and future trends of stock prices are in the final analysis, prejudiced by the expectations and objectives of the Exchange establishment’s elite clique. We have observed that the specialist’s price movements are based on an awareness of what he already knows will take place. In this sense it can be said that the specialists vision of things to come underlies and gives rise to the manner in which he utilizes price in order to generate the forces of public supply and
demand. In fact, it is possible to say that the future is molded by the specialist and his system into a highly flexible blueprint to be followed to its logical conclusions through time. Stock charts, which record a stock’s high, low, and close outline the past history of these blueprints. Below I have listed nine traditional investor views and compare them against my principles for investing in the market. As investors in the market place see where your investing philosophy’s match up in relation to these views, and how they relate to the market’s actions now. 1) Traditio Traditional nal View View: At times times of recessio recession n one should buy “defensive” issues, including including bonds. Defensive issues are, among others, utilities, foods, tobaccos, food chain stores.
My View: View: In times of recession common stocks can advance more dramatically than in more prosperous economic periods. This is because the tendency of the public is to assume that stock prices advance only to the accompaniment of good earnings announcements. Specialists capitalize on this myth by advancing stock prices when conditions are at their worst and dropping stock prices when conditions are booming. As for buying defensive stocks: the only stocks that should be bought are ( A) those that give evidence of specialist accumulation and ( B) those that serve to limit the investor’s risks because of active institutional participation. As for investing in bonds, I consider them to be a high risk for the simple reasons that bond prices are even more manipulated by insiders than stock prices, trades are not visible on a ticker tape, and information concerning the transactions of insiders is nonexistent. Bonds are an indispensable method of corporate financing which provides the investment banking industry with enormous sources of income. If these profits are to continue, the industry must condition investors to believe that their portfolios should at times include a large percentage of these issues.
Naturally it is in the interest of Exchange insiders to spread the propaganda that a move out of common stocks and into bonds as a “defensive “defensive measure” measure” during periods of recession is advisable, because investors then sell their common stocks to these insiders at the very time stock prices can be expected to soon advance. Their chief advantage to an investment advisor is that tradition allows him to stick half of a multimillion-dollar portfolio into bonds, thereby cutting in half his workload and his exposure to criticism. He is “Safe “ Safe”” when he loses money in bonds since, like everyone else; he acted in what is termed a “ defensive” defensive ” manner. 2) Traditio Traditional nal View View: There There are times times when it it is safer to trade that to invest.
My View: View: If the investment environment does not appear conducive to commitment for longterm capital gains under minimum risk circumstances, then one should properly remain out of the market and in cash instruments such as commercial paper and C.D.s. Although trading on the basis of shortterm rallies can occasionally be profitable, the risks, in my opinion, are too high and the rewards to small to be acceptable. 3) Traditio Traditional nal View View: Economic Economic develo developmen pments ts affect public opinion, which affects s tock prices.
My View: View: The stock market is an internal operation. Economic developments do not, therefore, cause stock prices to move one way or the other. They can and will be used to rationalize stock price movements or to exploit investor psychology. In the final analysis, however, although economic conditions do not influence the market, the market does have enormous impact on economic conditions. 4) Traditional Traditional View: View: The Federal Reserve controls booms and busts through its control of the money supply and interest rates, which in turn affects the market.
My View: View: The Federal Reserve system is an instrument of the Stock Exchange establishment. Thus, when a major rally or bull market is underway, the Fed can be expected to create conditions that cause interest rates to decline. When stock prices are ready to decline, the Fed will institute conditions that again cause interest rates to rise. By lowering interest rates the Fed and banks cause the public to move out of cash instruments and into stocks as stock prices move to their highs. Since the public has been conditioned to believe that lower interest rates cause an advance in stock prices, the Exchange has a ready alibi to hand to the media for rising stock prices. When interest rates are raised to higher levels as stock prices move to their lows, the public is persuaded to sell their stocks and move into cash instruments – thereby not only enabling insiders to accumulate more shares but also preventing these investors form profiting from the advance in stock prices when it occurs. By the same token, the increase in interest rates also provides the Exchange with the alibi it needs to legitimatize falling stock prices. 5) Traditional Traditional View: Play a trend and and get out when it seems to be stopping.
My View: View: A stocks trend will always seem to stop at one time or another as it proceeds toward its highs. That is because specialists will attempt to shake investors out of stocks before advancing them to their highs. The only time to “get “ get out” out” is on the appearance of major selling by specialists. 6) Traditional View: Cut your losses let your profits run.
My View: View: Follow this bit of folklore and, on the one hand, you may well be cutting your loss just before a major rally takes place, while on the other hand, by letting your profits run, you are assuming you can determine when your profits are about to become losses. The fact is, specialists will always
drop prices before a major rally so that you could well be “cutting “ cutting a loss” loss ” just before it turns into a major gain. The time to sell, whether you have established a profit or loss, is when, after an advance in stock prices you have evidence of big block specialist selling. 7) Traditional Traditional View: On tape watching: watching: Expanding volume on a rising market is bullish. Expanding volume on a falling market is bearish. Declining volume on a rising market is bearish. Declining volume on a falling market is bullish.
My View: View: Expanding volume on rising stock prices is bearish, since it indicates increasing insider distributions, which tends to maximize itself as stock prices near their highs. Expanding volume on falling stock prices is bullish, since it indicates that specialists are accumulating increasing quantities of stock, which they wish to dispose of at much higher price levels from those they bought it at. Declining volume on rising prices is bullish, since it indicates specialists are managing to advance stock prices covertly without attracting much public attention. This is a strategy employed by specialists when they have accumulated large inventories of stock at a low price, which they wish to dispose of at much higher price levels. An advance on low volume, therefore, allows them to retain the bulk of their inventories in order to dispose of it at optimum price levels. Declining volume on falling prices is bearish, since it indicates that specialists will continue to lower stock prices until their inventory accumulations necessitate a rally. 8) Traditional Traditional View: Big blocks blocks on upticks are bullish signs.
My View: View: Big blocks on upticks are bearish, since they indicate that insiders are distributing inventory and are or soon will be selling short. On the other hand, big blocks on downticks are bullish, since they indicate insiders are accumulating stock that they will soon want to sell at higher price levels.
9) Traditional View: A high short interest number is bullish.
My View: View: Short selling is an activity that makes declines in the market place profitable to specialists, not investors. The media, however, persuades most investors to believe that investors are responsible for high short interest. It is then suggested since they must inevitably “cover “ cover ” their short sales, this will cause a sharp advance in stock prices. Hence investors are lead to believe that high short interest is bullish and a low short interest is bearish. The fact is however, the specialists only sell short when they intend to drop stock prices. Since more than 85 percent of all short selling is done by Stock Exchange specialists and other members, a high short interest is a sign that the market is doomed to a decline. Richard W. Wendling 12/09/07
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