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Specialists: How They Shade TraditionalThinking Versus Reality
By now the reader of these articles is surelyaware that most investors are ruined in themarket because of their failure to recognizethe causes of the market’s trends are due to asuccession of concrete and particular events,all of which are linked to one another throughthe specialist as today is linked to yesterdayand tomorrow. Isolated, the various activitiesof the specialist may make no sense what soever. Yet systematic knowledge of themarket’s historical trends reveals that whilethe specialist will be profoundly influenced bywhat happens in the present, what happens inthe present or over the short term will beprofoundly affected by and runs parallel, so tospeak, with his longer term inventoryobjectives.In other words, if he establishes a downtrendfrom a high today, he will begin to precipitatepublic selling tomorrow. The inventory heacquires in the course of this first decline froma high then becomes a permanent element of the rallies which must follow and which heconducts in order to unload his unwantedinventory of stocks.
One can make the followinggeneralization about these rallies; that the insider selling and short selling occurring at the rallyhighs have a specific relationship to theforthcoming declines from rally highs.
Insider selling and short selling are not,however, the only determinate of the extent of the decline.
The relationship between publicselling and its impact on the specialist’sinventories also determines the extent of thedecline from a rally high
and the plan of actionthat will be taken by specialists to unload thisinventory.
Inevitably as prices move down from the finalhighs, the investor’s financial page will be advisinghim not to abandon faith in the underlying strengthof the market.
He will be told, “It is only logicalto expect some sort of pullback, or at least aconsolidation phase in the market.”
 
Theinvestor’s problem will be rallies in the Dow,which will attempt to hide the fact that theoverall market is declining sharply. On somedays the Dow may close sharply higher whilethe preponderance of declines over advancesshows the market as a whole to be stilldisintegrating.Then, when the Dow continues its plungepast the levels at which investors wereadvised to look for support, they will be told tolook for support at levels that are still lower.Then, when these levels are penetrated, theywill be told that the experts expect to findsupport at the old lows. Then when some or all of their stocks begin to penetrate their oldlows, they feel it is then too late to sell. Near the bottom they will hold on until the mediagrows pessimistic. Then, thinking he shouldtry to save something, investors will selleverything.We have seen that the investor’sdisappointments are proportionate to thedegree in which his activities unknowinglyassist in the development and refinement of the specialist’s practices. When investor’s arebuying, on balance, specialists are selling.When investors’s commit themselves toheavy selling, specialists are buying. Thus thepublic’s bearishness is actually bullish, and itsbullishness is, in fact, bearish.It should now be clear that nothing is natural;nothing is, as it seems to be. The movementof stock prices is not the reflection of economic law. The present and future trendsof stock prices are in the final analysis,prejudiced by the expectations and objectivesof the Exchange establishment’s elite clique.We have observed that the specialist’s pricemovements are based on an awareness of what he already knows will take place. In thissense it can be said that the specialists visionof things to come underlies and gives rise tothe 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 thefuture is molded by the specialist and hissystem into a highly flexible blueprint to befollowed to its logical conclusions throughtime. Stock charts, which record a stock’shigh, low, and close outline the past history of these blueprints.Below I have listed nine traditional investor views and compare them against myprinciples for investing in the market. Asinvestors in the market place see where your investing philosophy’s match up in relation tothese views, and how they relate to themarket’s actions now.
1)Traditional View : At times of recession oneshould buy “defensive” issues, includingbonds. Defensive issues are, among others,utilities, foods, tobaccos, food chain stores.
My View
: In times of recession commonstocks can advance more dramatically than inmore prosperous economic periods. This isbecause the tendency of the public is toassume that stock prices advance only to theaccompaniment of good earningsannouncements. Specialists capitalize on thismyth by advancing stock prices whenconditions are at their worst and droppingstock prices when conditions are booming. Asfor buying defensive stocks: the only stocksthat should be bought are (
A
) those that giveevidence of specialist accumulation and (
B
)those that serve to limit the investor’s risksbecause of active institutional participation.As for investing in bonds, I consider them tobe a high risk for the simple reasons thatbond prices are even more manipulated byinsiders than stock prices, trades are notvisible on a ticker tape, and informationconcerning the transactions of insiders isnonexistent. Bonds are an indispensablemethod of corporate financing which providesthe investment banking industry withenormous sources of income. If these profitsare to continue, the industry must conditioninvestors to believe that their portfolios shouldat times include a large percentage of theseissues.Naturally it is in the interest of Exchangeinsiders to spread the propaganda that amove out of common stocks and into bondsas a “
defensive measure
” during periods of recession is advisable, because investorsthen sell their common stocks to theseinsiders at the very time stock prices can beexpected to soon advance. Their chief advantage to an investment advisor is thattradition allows him to stick half of amultimillion-dollar portfolio into bonds, therebycutting in half his workload and his exposureto criticism. He is “
Safe
” when he losesmoney in bonds since, like everyone else; heacted in what is termed a “
defensive
”manner.
2)Traditional View : There are times when it issafer to trade that to invest.
My View
: If the investment environment doesnot appear conducive to commitment for long-term capital gains under minimum riskcircumstances, then one should properlyremain out of the market and in cashinstruments such as commercial paper andC.D.s. Although trading on the basis of short-term rallies can occasionally be profitable, therisks, in my opinion, are too high and therewards to small to be acceptable.
3)Traditional View : Economic developmentsaffect public opinion, which affects stockprices.
My View
: The stock market is an internaloperation. Economic developments do not,therefore, cause stock prices to move oneway or the other. They can and will be used torationalize stock price movements or toexploit investor psychology. In the finalanalysis, however, although economicconditions do not influence the market, themarket does have enormous impact oneconomic conditions.
4) Traditional View: The Federal Reservecontrols booms and busts through its controlof the money supply and interest rates, whichin turn affects the market.
 
My View
: The Federal Reserve system is aninstrument of the Stock Exchangeestablishment. Thus, when a major rally or bull market is underway, the Fed can beexpected to create conditions that causeinterest rates to decline. When stock pricesare ready to decline, the Fed will instituteconditions that again cause interest rates torise.By lowering interest rates the Fed and bankscause the public to move out of cashinstruments and into stocks as stock pricesmove to their highs. Since the public hasbeen conditioned to believe that lower interestrates cause an advance in stock prices, theExchange has a ready alibi to hand to themedia for rising stock prices. When interestrates are raised to higher levels as stockprices move to their lows, the public ispersuaded to sell their stocks and move intocash instruments – thereby not only enablinginsiders to accumulate more shares but alsopreventing these investors form profiting fromthe advance in stock prices when it occurs.By the same token, the increase in interestrates also provides the Exchange with thealibi it needs to legitimatize falling stockprices.
5) Traditional View: Play a trend and get outwhen it seems to be stopping.
My View
: A stocks trend will always seem tostop at one time or another as it proceedstoward its highs. That is because specialistswill attempt to shake investors out of stocksbefore advancing them to their highs. Theonly time to “
get out
” is on the appearance of major selling by specialists.
6) Traditional View: Cut your losses let your profits run.
My View
: Follow this bit of folklore and, onthe one hand, you may well be cutting your loss just before a major rally takes place,while on the other hand, by letting your profitsrun, you are assuming you can determinewhen your profits are about to becomelosses. The fact is, specialists will alwaysdrop prices before a major rally so that youcould well be “
cutting a loss
” just before itturns into a major gain. The time to sell,whether you have established a profit or loss,is when, after an advance in stock prices youhave evidence of big block specialist selling.
7) Traditional View: On tape watching:Expanding volume on a rising market is bullish.Expanding volume on a falling market isbearish. Declining volume on a rising market isbearish. Declining volume on a falling market isbullish.
My View
: Expanding volume on rising stockprices is bearish, since it indicates increasinginsider distributions, which tends to maximizeitself as stock prices near their highs.Expanding volume on falling stock prices isbullish, since it indicates that specialists areaccumulating 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 toadvance stock prices covertly withoutattracting much public attention.This is a strategy employed by specialistswhen they have accumulated largeinventories of stock at a low price, which theywish to dispose of at much higher price levels.An advance on low volume, therefore, allowsthem to retain the bulk of their inventories inorder to dispose of it at optimum price levels.Declining volume on falling prices is bearish,since it indicates that specialists will continueto lower stock prices until their inventoryaccumulations necessitate a rally.
8) Traditional View: Big blocks on upticks arebullish signs.
My View
: Big blocks on upticks are bearish,since they indicate that insiders aredistributing inventory and are or soon will beselling short. On the other hand, big blocks ondownticks are bullish, since they indicateinsiders are accumulating stock that they willsoon want to sell at higher price levels.
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