Specialists, How They Use Their Position of Power To Fix Stock Market Prices To know your adversary, you must become familiar with his customs; to understand the influence that specialists exercise over the market, you must be able to identify the practices that they employ to rig stock prices. While reading this article you will be shown that the interdependence of such underlying functions as specialist short selling, of public supply and demand, of volume as it interacts with price, along with the Dow industrial average and the role of the media, is the foundation for the specialist’s ability to consistently maximize his profits at the expense of investors. The reader must understand these practices and processes if he is to analyze actual market events at a level of critical awareness that enables him to maximize his own profits. Recognizing that investors must be provided simple solutions for complex investment problems, the Exchange has conditioned them to respond to the surface of price action. If specialists want investors to buy stock, they simply raise stock prices sharply. This then creates demand. If they want to cause massive selling, they drop stock prices sharply. It is merely a matter of engineering for them. The significant function and underlying objective of such price action is, of course, to serve the specialists’ inventory needs. In the course of a rally, therefore, specialists supply public demand by unloading their inventories and then selling short. By starting a decline, specialists are able to use the ensuing public selling to cover their short sales and to accumulate stock for their trading and personal investment accounts. Since specialists can predict the behavior of the public when they raise or lower stock prices, they have only to decide how they wish investors to behave. How they wish investors to react will depend on the
disposition of their inventory and whether they wish to advance stock prices to dispose of stock or lower stock prices in order to accumulate stock for their personal investment accounts. It will be easier for the average investor to see how the process unfolds if he places the operation in the context of a merchant: 1) Once Once the spec special ialist ist has accu accumul mulate ated d an inventory of stock in a company in which he is registered at wholesale prices, his next object will be to rally prices to retail levels in order to divest himself of this inventory of stock. 2) Having Having sold sold his stock at retail retail prices, prices, he will then want to lower stock prices to the wholesale level again in order to re-accumulate a new inventory of stock.
It must be made clear to investors that there is no specific price in any stock that can be consistently called wholesale or retail. A price of $80 in Lehman Brothers for example, would be wholesale if the specialist buys stock at that level with the intention of selling it at $90; $80, on the other hand, could be retail on another occasion if the specialist shorts the stock at $80, and then drops the price to $70. It should be made obvious to the investor that the specialist’s prime objective is to “always “always”” sell any given block of stock at a higher price than that which he bought it at. It is important to note at this point and time that in lowering his stocks price from retail to wholesale, the specialist’s profit incentives dictate that he must not carry down to wholesale price levels the stock that he must buy from investors at what are still retail price levels. In order to observe this requirement, therefore, once he drops stock prices, causing public selling, he must then rally prices until he can divest himself of that inventory of stock before continuing to lower levels. Thus we see that when the specialist’s long-term objective is to lower stock prices to wholesale levels, the techniques he will
employ will favor a course of action that enables him to conduct a continuing series of declines followed by short advances. He will tend to avoid a straight-line decline, which would cause very heavy selling, thereby causing him to acquire an inventory of stock that he would be able to dispose of only in the course of what have to be a long term, rather than a short term, rally. Thus in the course of a routine decline of 1000 to 2000 points in the Dow, as specialists trend stock prices lower, they will generally rally prices as often as they drop them, the major different being that the amounts of the declines will be on balance, greater than the advances. Naturally, when the specialist wishes to conduct a major rally, he will either conduct a long period of accumulations at a low critical price level or he will employ a sharp straightline decline as h rushes toward a bottom. It is the fear engineered by a sharp drop in prices that allows him to accumulate the largest amount of stock possible in the shortest time because of the “panic “panic selling” selling ” that always happens when the markets drop 1000 or more points in a four or five day period. As I mentioned earlier, whether it is a move toward the stocks low or high, the short sale enables specialists to determine the short; intermediate-, and long-term price objectives of their stocks. Using the short sale, specialists in active stocks like General Motors, Lehman Brothers, or General Electric, for example, can halt the advance or decline of their stock at whatever prices they wish. The specialist employs his short sale in the context of the following process: 1) His main main object objective ive is is to accumulate accumulate stock at its its lows and then rally stock prices higher. 2) By rallyi rallying ng stock stock prices he stimulat stimulates es public public demand for his stock. The larger the price advance, the greater the demand for his stock. (More often than not, this demand will occur the day after the advance). 3) Once Once public public deman demand d has allow allowed ed him him to sell sell off off his inventory at retail price levels, in order to
supply additional demand for his stock, he then sells short-at what are often times even higher retail price levels. 4) Since Since the the profit profitabi abilit lity y of his his short short sales sales depends on a subsequent decline in his stock, he will tend to limit the extent of any additional advance beyond the price levels at which he sold short. For practical purposes it can be said that once he begins to sell short he will try to limit his short selling (depending on the price of the stock) to within a two-to-five point range. Once he halts his stocks a dvance, demand soon thereafter begins to dry up. 5) When When this this happen happens, s, the the speci speciali alist st is is in a position to begin the movement of his stock’s price toward lower price levels. 6) As his his stock stock decline declines s from from the high high,, he may may encounter heavy public selling. He can then use his short sale position to absorb that selling by covering his short sales.
You must reconcile yourself to the fact (and learn to exploit it) that the specialist is able to control both advances and declines through the use of his short selling. Nothing revels the specialist’s inventory objectives more conclusively than the manner in which price is used to influence volume. Most investors take no account of the implications of different volume characteristics that exist in one stock or between one stock and another. To the average investor the price of the stock is all that matters. To the specialist, however, the function of price is the intercourse it has with volume. A stock’s volume characteristics, therefore, are the means by which the investor may determine that a change is taking place or about abo ut to take place in that stock or in the internal character of the market. The higher the specialist advances the price of, say, a stock like Lehman Brothers from $60 to $90 in the course of a rally, for example, the greater will be the demand, or volume, that this specialist will be able to produce for his stock. If the specialist raises the price substantially, he will also expect to increase volume materially. Once again we come to the conclusion fundamentally different from that now held by investors, (IE), it is not demand that causes rising stock prices,
but instead it is rising stock prices that cause demand in a stock. It is the demand that results
from rising prices that enables the specialist to unload the greatest portion of his stock at the most profitable price levels. The exact reverse would, of course, hold true in the course of a decline from the $90 to $60 price levels in a stock like Lehman Brothers. The specialist would be able to accumulate the greatest amount of stock as his price declines to the $60 level. During those rare moments when investors do think about the rise and fall of stock prices, their beliefs are, naturally, opposite to what is actually the case. Thus they consider it to be a bad thing when stock prices fall on heavy volume and assume the decline is temporary when it is on light volume. What the investor must recognize is that rather than foreshadowing lower prices, heavy selling ultimately ” causes prices to advance. When “ultimately” specialists trigger heavy public selling they of course are buying. Since they will not wish to carry this stock to lower price levels, thereby incurring a loss, they will advance stock prices in order to unload this inventory at a profit. It is only when they are able to decline on light volume that they can afford to carry the decline to lower price levels . If for instance, the specialist in Lehman Brothers is in the process of dropping his stock from $90 to $80 and incurs heavy selling as he reaches $84, he will be obliged to rally prices back to $88 or higher in order to divest himself of this inventory. Having completed this, he can then proceed back down through that same territory to the accompaniment of lighter selling and lower volume. Thus it is the specialist’s objective to raise and lower prices on light volume until he reaches the price objective at which he wishes to see heavy volume. It is for this reason that the appearance of big blocks consistently defines the short intermediate, and long-term reversal points in stock prices.
If, for example, the specialist wishes to lower prices on light volume but instead incurs heavy selling at, say the halfway point toward his downside price objective, that volume will manifest itself as big blocks, at which point he will invariably reverse his direction in order to rally his price in order to unload that inventory. When he does this, big blocks again define the upper limits of the price level at which he will once again reverse the trend in order to resume the decline. Big blocks at the tops and bottoms of all moves become larger and more frequent depending on the duration and amount of the move. As you advance your knowledge of the specialist you will observe that in the course of a major rally or decline, volume will increase as stocks move toward or just through what I call their “critical “ critical numbers.” numbers .” Big block activity is localized around prices like $20, $30, $40, $50, because of the way exponentials of 10 are charged in the investor’s mind. The point of this is that the investor’s perception of his environment and his response to it are quite often ruled by compulsion to conform his activities to sets of numbers in terms of the manner in which the decimal system has come to influence him. In short it is precisely for this reason that specialist’s have learned that there is a certain predictable pattern investors follow in buying and selling stock and that this pattern is based on the legacy of what is referred to as the “numbers “numbers theory.” theory .” The evidence of this is the striking volume patterns that tend to occur at the multiples of 10. Thus specialists tend to base the manner in which they manipulate their stock prices on the most ordinary of plots, (IE), that if a stock is dropped from say $70 to $60 of the investors who sell that stock during the decline, the greater percentage will sell at or near the $60 level than anywhere between $70 and $60. Investors naturally have no idea that the reason the impulse to sell at $60 is much stronger than at $65 is that they are doing the
bidding of the instinct that is older than the pyramids. Nor do they realize that the misfortunes surrounding their investment decisions are greatly caused by the consistency with which specialists are able to exploit the manner in which investors’ number instincts cause them to act. For example, a specialist will drop his stocks price to a critical number, acquire the increasing amount of shares that are sold to him, as he approaches this price level, and then, having cleared out his book down to the critical number ($30, ( $30, $40, $50, etc.), etc .), he will launch a rally that often times carries the stock to just under or just above another critical level ($60, ( $60, $70, $80, etc.). etc .). Whether he stops just under or just above the critical level depends on the amount of buy or sell orders he sees on his book just beyond the critical number and what his objectives are at that time. Gradually the investor will learn how, in the course of a major rally or decline, specialists move prices like a pendulum back and forth across critical numbers until, because of the actions of price, the action of volume either subsides or increases dramatically, thereby moving the market into areas of new definition, from bear to bull or bull to bear. In defining the instruments employed by specialists to achieve their ends, you should not overlook the distortions of reality created by the Dow Jones industrial average. Employing daily announcements about the average, the media bullies investors into mass movements in and out of the market. To understand the function of the Dow, the investor must look at it from the point of view of the Exchange insider who is constantly mindful of his duty to indoctrinate investors into ways of analyzing events and taking actions, which are dependable for the achievement of the specialist’s objectives. From the specialist’s point of view an index like the Dow brings it all together, since it has the ability to create herd enthusiasm on the one hand or panic on the other. It is the
perfect tool for creating emotional rather than logical reactions. Although a 400 point rally in the Dow may mean very little in terms of the individual stocks that make up the index, (it represents an average gain of 1.66 points in each of the 30 Dow stocks), the Exchange discovered long ago that because investors assume that an important move in the Dow corresponded equally to an important move in all stocks, they can be easily persuaded to leap into action when this index dramatically advances or declines. To counteract this the investor should keep in mind that while most stocks tend to rise and fall with the movements of the Dow, a 150 point rally in the Dow will often correspond to an advance of less than $.50 per share in the NYSE composite. The knowledge that “the “the market” market” does, sympathy” with the Dow however, move “in “in sympathy” can be of great use to investors. It is virtually impossible for the investor to solve the problems of timing until he learns to differentiate and describe the movements not of the Dow but of the individual stocks that comprise the Dow. In so doing he will come to appreciate how Dow specialists work together as a group, exercising their power through consensus, harmonizing their movements like so many musical instruments to produce the markets full orchestration. Like the musicians in an orchestra, the specialists who conduct the movements of each of the Dow stocks work on behalf of their own interests while at the same time working for the fulfillment of the objectives of the system as a whole. This could well me that while Microsoft is advancing to compensate for the decline in other stocks, some specialists in the Dow would, so to speak, be sitting with their hands in their laps until their moment came to perform. And although the specialist in General Motors may have solved his inventory problems on the upside at the top of a rally by establishing a short position that will carry him profitably to
lower price levels, if necessary he will at the market’s opening raise the price of his stocks, as will other Dow specialists in order to help other Dow and non-Dow specialists divest themselves of their inventories. Thus the specialists in four or more Dow stocks may move to within two to three points of their highs, where they will wait until the prices of other Dow and non-Dow stocks have also moved within striking distance of their highs. Then at what is obviously a prearranged signal, most specialists will simultaneously launch their stocks toward their highs. This will then bring in the crescendo of investor demand that enables specialists to establish major short sales before dropping stock prices. In order to rationalize such an advance in the publics mind and to provide it with the semblance of legitimacy, this event can be times to coincide with an economic or political announcement investors will assume has major bullish implications for the overall market. [IE] The Federal Reserve lowering interest rates. It is only by grasping the ideas important in pattern recognition that the investor can begin to understand the direction in which specialists intend to move their stocks in order to assure the fulfillment of the goals of the unit as a whole. At the same time, only pattern recognition provides our educated intuitions with an understanding of the goals of the unit as revealed by the simultaneous interplay of price and volume in each of the thirty Dow stocks. It is this interplay that translates itself into recognizable patterns or mosaics that tell us what the specialist is planning and what his stock’s future pattern can be expected to look like. This information cannot be gathered from watching the Dow, since the Dow does not prescribe the movement of the thirty stocks; rather, it is the thirty stocks that prescribe the movement of the Dow. The Stock Exchange is able to command investors because the information provided
investors by the media invests it with the apparatus of control. More from ignorance on their part than from a realization of the clear and conscious intent on the part of their publishers, most of the writers who prepare an analysis of daily market action do so from material prepared for them by Stock Exchange sources and relayed to them through the various wire services. This information is of great practical use to the Exchange, for it is well structured and integrated into the investor’s emotional life. The material that is the most effective in the formation of investor opinion is also furthest from reality. In consequence the public is persuaded to believe that the market advanced because of high short interest or the lowering of interest rates. On the other hand they will become encouraged to believe it declined because of the increase in the wholesale index or because of “profit “profit taking by investors.” investors .” It is therefore not surprising that investors always look for solutions that do not correspond to reality. Investors are easy marks for the seeming logic of half-truths and judgments. Thus it is a simple matter for the Exchange to move them in directions contrary to those in which investors would like to go. By the same token the media’s unexamined premises lead investors to conclusions that are a great distance from what is in fact occurring on the floor of the Stock Exchange. The only news that is fit to print is the official proclamations of the Stock Exchange or the semiofficial comments (what “brokers “brokers say”) say”) of its surrogates. Thus the media grants the Stock Exchange establishment “squatter’s “squatter’s rights” rights ” over the expression of opinion. Although it is not possible for the average investor to escape from the Exchange’s daily propaganda barrage, he can learn to avoid its consequences by questioning the premises and the value judgments that even the most thoughtful investors accept at fare value.
If the proposal that we should try to beat the specialist at his own game seems impossibly ambitious, the counter proposal that we should simply abandon the playing field to him is even more absurd. For the fact is, effective information about the specialist and his merchandising practices can have highly constructive consequences. Investors can continue to shift the blame for their losses on their stockbrokers for all that they’ve done or left undone, or they can stop worrying about what is being done to them in order to learn what there is that they can do for themselves. Heady possibilities will open up once they come to understand the game plan of the stock market’s principle players. Richard W. Wendling
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