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 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:
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 long-
term 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" 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.