Specialist Movements Within The Market There are approximately 500 specialists who operate on the floor of the New York Stock Exchange. Specialists make between 84 to 192 percent a year on their capital investments. Specialist activities reveals that once he has sold out his investment account and established a short position at his stock's high his long term objective is then to take stock prices down to wholesale price levels in order to cover his short sales and once again to accumulate stock. Once his investment accounts are satisfied, his bias will be biased toward advancing or lowering his stock's price to maximize his personal profits. If specialists want investors to buy stock, they simply raise stock prices sharply. If they want to cause massive selling, they drop stock prices precipitously. In the course of a rally, therefore, specialists supply public demand by unloading their inventories and then selling short. By precipitating a decline, specialists are able to use the ensuing public selling to cover their short sales and to accumulate stock for their trading and 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 behave will depend on the disposition of their inventory and whether they wish to advance stock prices to dispose of inventory or lower stock prices in order to accumulate inventory. It might be easier for you to understand this process if you place yourself as a merchant. 1) Once the specialist has accumulated an inventory in a stock in which he is registered at wholesale, his objective will be to rally prices to retail in order to divest himself of this inventory.
2) Having sold this stock at retail, he will want to lower stock prices to wholesale in order to re-accumulate a new inventory of this stock. He will tend to avoid the straight-line decline, which could precipitate heavy selling, thereby causing him to acquire an inventory that he would be able to dispose of only in the course of what might have to be a long-term, rather than a short-term, rally. Thus, in the course of a routine decline of 1000 to 3000 points in the Dow, as specialists trend stock prices lower, they will generally advance prices as often as they drop them, the difference being the amounts of the declines will be, on balance, greater than the advances. The specialist employs his short sale in the context of the following process: 1) His objective is to accumulate stock at wholesale and then to rally stock prices. 2) By rallying stock prices he stimulates public demand for his stocks. The larger the price advance, the greater the demand he stimulates. 3) Once public demand has enabled him to dispose of his inventory at retail price levels, in order to supply additional demand he then sells short - at what are often times even higher retail price levels. 4) Since the profitability of his short 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 to within a five to ten point range in an individual stock. Once he halts his stock's advance, demand soon thereafter begins to dry up. 5) When this happens, the specialist is in a
position to begin the movement of his stock's price toward wholesale price levels. 6) As his stock declines from its high, he may encounter heavy public selling. He can then use his short position to absorb that selling by short covering. It is not demand that causes rising stock prices but rising stock prices that cause demand. As you advance your knowledge of specialist activity you will observe that in the course of a major rally or decline, volume will increase as stocks move toward or just thru their "critical "critical numbers." numbers ." A specialist will drop his stock's 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 cleaned out his book down to the critical number, he will launch a rally that oftentimes carries the stock to just under or just above another critical level. 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 objective is at the time. In the course of a major rally or decline, specialists move prices like a pendulum back and forth across critical numbers until, because of action and price, the action of volume either subsides or increases dramatically, thereby moving the market into areas of new definition, from a bear to a bull or a bull to a bear. There are 22 specialists who control the thirty stocks of the Dow industrial average. As you examine their habit patterns you will see that it is virtually impossible for the investor to solve the problems of timing until you learn to differentiate and describe to movements not of the Dow but of the individual stocks that comprise the Dow. Thus the specialists in four or more Dow stocks may move to within two or three points
of their highs, where they will wait until 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. At market highs, specialists account for approximately 75 percent of all short selling, other Exchange members about 15 percent, and the public about 10 percent. What the investor must do is to learn how to recognize specialist short selling. Once he is able to identify its signs, he can use it as a decisive signal that warns him of impending danger. Dow volume is one of the most important means of identifying specialist short selling. When in the ordinary course of business the daily volume in this index of 30 stocks alone exceeds 500 million shares the investor should be on the lookout for a short reversal in the Dow average and the overall market. As stocks move to an important high or low one can expect to see the Dow volume reaches 2.5 billion to 3.0 billion shares for three or more days before a reversal occurs. Thus when stocks are in transit from short or intermediate term lows to their highs, it is a general rule that when the daily Dow volume exceeds 3.0 billion shares it can be assumed Dow specialists have liquidated or are in the process of liquidating their trading account inventories and are selling short to supply demand. As previously mentioned, volume figures are the most important clue to specialist intent . The specialist's merchandising strategies are organized to minimize public selling during a decline and, therefore, the amount of inventory that they must absorb, place on their shelves, and carry with them as they lower stock prices toward wholesale prices. What this comparatively low volume indicates is that the public has been subtly and silently persuaded not to sell stock they would have
sold had they thought for a moment that prices were headed lower. Rallying stock prices from time to time, and rallying the investor’s hopes so that, although the evidence of declining stock prices is right there before his eyes, he will flatly refuse to believe the evidence of his senses to it. What is totally alien to the understanding of most investors is that Exchange insiders are able to derive benefits from a crashing stock market, but in order for them to enjoy these benefits, stock values must go down. The reason the industry fastens the public's attention on economic fundamentals is that they cause the investor to plot a curve for buying at the top of a rally and selling at the bottom. The ability to sell short at the top in response to public demand and then to cover the short sales in response to public selling allows specialists to create a situation that, in the stock market, would seem at first glance to be manifestly, impossible, one in which it would be possible, for all practical purposes, to eliminate uncertainty. The specialist’s power is vividly illustrated in the way he is able to break the investors spirit one day and then, to serve his purposes, generate new faith the next. Thus, the specialist advances his plot line one step further by showing the investor that what he feels he is unable to gain in the market because of his lack of skill he can gain because of the existence of good luck. By raising prices high enough the specialist easily persuades the investor to forget the bad luck he had in the past. Insiders, particularly specialists, operate as members of a closed group with a code of conduct and ethics all their own. They are highly organized because they deal in big money.
Volume is the investor's window onto the floor of the Stock Exchange. Properly utilized, it brings the investor face to face with the specialist's attitude toward his inventory, whether he wants to dispose of it or add to it and, therefore, raise or lower his price. The problem is that investors have not been trained to examine the movements of volume as an indicator of change. Instead they believe that high volume in the course of a rally is proof of the "markets underlying strength." In fact the very opposite is true. Volume is either a manifestation of specialist accumulation when it is on the downside or an indication of specialist distribution when it occurs on the upside. How severe a decline will be in stock depends on the extent of the specialists short sales and how well he conserves them. Rallying stock prices almost immediately after they have begun to decline is an institutionalized system for unloading the first batch of stop loss orders that are accumulated by specialists from their books. The scale of organization inherent in a decline, any decline, imposes on specialists in highly active stocks functions that demand their most scrupulous attention. The conflict of opposing interests between insiders and outsiders must be carefully disguised so as not to cause a breakdown in the game plan that would result in an avalanche of selling by outsiders. The investor is able to learn how to gauge the specialist, anticipate his intent and his movements from only two things, the worm of his price and its shadow, volume. Although the specialist is the only one who knows what his plans are, what he is going to do, and when he is going to do it, the investor does know what he did, when he did it, and quite often, what it means he must do in the future because of what he has done in the past. The investor has one advantage over the specialist. The specialist can't hide from him.
He is, therefore, vulnerable. At the right time, all the investor need do is walk up to the specialist crap table and place his bet. The specialist has to cover it. The following is a list of my investment ideas: ideas: 1) 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. The only stocks that should be bought are those that give evidence of specialist accumulation and those that serve to limit the investor's risks because of active institutional participation. 2) 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 or CD’s. 3) The stock market is an internal operation. Economic developments do not, therefore, cause stock prices to move one way or the other. They can 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 an enormous impact on economic conditions. 4) 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 or begin a decline, the Fed will
institute conditions that again cause interest rates to rise. 5) A stock's price 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 out" is on the appearance of major short selling by specialists. 6) Cut your losses, let your profits run. The fact is specialists will always drop prices before a major rally so that you could well be "cutting a loss" loss " just before it turns into a gain. The time to sell, whether you have established a profit or a loss is when, after an advance in stock prices you have evidence of big block specialist selling. 7) Expanding volume on rising stock prices is bearish, since it indicates increasing insider distribution, 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 higher levels. Declining volume on rising prices is bullish, since it indicates specialists are managing to advance stock prices covertly without attracting public attention. 8) Big block trades on up ticks 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 they will soon want to sell are higher prices. 9) Short selling is an activity that makes declines in the market profitable to specialists, not investors. As we interpreted big block activity and specialist short selling, it reflected the fact that the retreat of the Dow from each mid-month high, which was then followed by another
advance to a still higher monthly high, meant only that investors were favored by the immediate necessities of specialists inventory distributions and short selling. A decline would ultimately begin that would catch the investor by surprise. Instead of recovering as they had in the past when the Dow moved down from a new high, prices would continue to sink far below investor expectations. Compounding the investor's problem will be rallies in the Dow, which will attempt to hide the fact that the over-all market is declining sharply. On some days the Dow may close sharply higher while the preponderance of declines over advances show that the market as a whole is still disintegrating. Then, when the Dow continues its plunge past the levels at which the investor was advised to look for support, he will be told again to look for support at levels that are still lower. When those are penetrated, he will advised that the experts expect to find support at the old lows. When some or all of his stocks begin to penetrate their old lows, he will feel it is then too late to sell. Near the bottom he will hold on until the media grows pessimistic, then, thinking he should try to save something, the investor will sell everything. When investors are buying, on balance, specialists are selling. When investors commit themselves to heavy selling, specialists are buying. Thus the public's bearishness is actually bullish, and its bullishness is, in fact, bearish .
