Specialists, How They Use Their Position's of Power to Fix S

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Specialists, How They Use Their Position of Power To FixStock Market Prices

To know your adversary, you must becomefamiliar with his customs; to understand theinfluence that specialists exercise over themarket, you must be able to identify thepractices that they employ to rig stock prices.While reading this article you will be shownthat the interdependence of such underlyingfunctions as specialist short selling, of publicsupply and demand, of volume as it interactswith price, along with the Dow industrialaverage and the role of the media, is thefoundation for the specialist’s ability toconsistently maximize his profits at theexpense of investors. The reader mustunderstand these practices and processes if he is to analyze actual market events at alevel of critical awareness that enables him tomaximize his own profits.Recognizing that investors must be providedsimple solutions for complex investmentproblems, the Exchange has conditionedthem to respond to the surface of price action.If specialists want investors to buy stock, theysimply raise stock prices sharply. This thencreates demand. If they want to causemassive selling, they drop stock pricessharply. It is merely a matter of engineeringfor them. The significant function andunderlying objective of such price action is, of course, to serve the specialists’ inventoryneeds. In the course of a rally, therefore,specialists supply public demand byunloading their inventories and then sellingshort. By starting a decline, specialists areable to use the ensuing public selling to cover their short sales and to accumulate stock for their trading and personal investmentaccounts.Since specialists can predict the behavior of the public when they raise or lower stockprices, they have only to decide how theywish investors to behave. How they wishinvestors to react will depend on thedisposition of their inventory and whether theywish to advance stock prices to dispose of stock or lower stock prices in order toaccumulate stock for their personalinvestment accounts. It will be easier for theaverage investor to see how the processunfolds if he places the operation in thecontext of a merchant:

1)Once the specialist has accumulated aninventory of stock in a company in which he isregistered at wholesale prices, his next objectwill be to rally prices to retail levels in order todivest himself of this inventory of stock.2)Having sold his stock at retail prices, he willthen want to lower stock prices to thewholesale level again in order to re-accumulatea new inventory of stock.

It must be made clear to investors that thereis no specific price in any stock that can beconsistently called wholesale or retail. A priceof $80 in Lehman Brothers for example,would be wholesale if the specialist buysstock at that level with the intention of sellingit at $90; $80, on the other hand, could beretail on another occasion if the specialistshorts the stock at $80, and then drops theprice to $70. It should be made obvious to theinvestor that the specialist’s prime objective isto “

always

” sell any given block of stock at ahigher price than that which he bought it at.It is important to note at this point and timethat in lowering his stocks price from retail towholesale, the specialist’s profit incentivesdictate that he must not carry down towholesale price levels the stock that he mustbuy from investors at what are still retail pricelevels. In order to observe this requirement,therefore, once he drops stock prices,causing public selling, he must then rallyprices until he can divest himself of thatinventory of stock before continuing to lower levels. Thus we see that when the specialist’slong-term objective is to lower stock prices towholesale levels, the techniques he will

employ will favor a course of action thatenables 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 inventoryof stock that he would be able to dispose of only in the course of what have to be a longterm, rather than a short term, rally. Thus inthe course of a routine decline of 1000 to2000 points in the Dow, as specialists trendstock prices lower, they will generally rallyprices as often as they drop them, the major different being that the amounts of thedeclines will be on balance, greater than theadvances.Naturally, when the specialist wishes toconduct a major rally, he will either conduct along period of accumulations at a low criticalprice level or he will employ a sharp straight-line decline as h rushes toward a bottom. It isthe fear engineered by a sharp drop in pricesthat allows him to accumulate the largestamount of stock possible in the shortest timebecause of the “

panic selling

” that alwayshappens when the markets drop 1000 or more points in a four or five day period.As I mentioned earlier, whether it is a movetoward the stocks low or high, the short saleenables specialists to determine the short;intermediate-, and long-term price objectivesof their stocks. Using the short sale,specialists in active stocks like GeneralMotors, Lehman Brothers, or General Electric,for example, can halt the advance or declineof their stock at whatever prices they wish.The specialist employs his short sale in thecontext of the following process:

1)His main objective is to accumulate stock at itslows and then rally stock prices higher.2)By rallying stock prices he stimulates publicdemand for his stock. The larger the priceadvance, the greater the demand for his stock.(More often than not, this demand will occur the day after the advance).3)Once public demand has allowed him to sell off his inventory at retail price levels, in order tosupply additional demand for his stock, he thensells short-at what are often times even higher retail price levels.4)Since the profitability of his short salesdepends on a subsequent decline in his stock,he will tend to limit the extent of any additionaladvance beyond the price levels at which hesold short. For practical purposes it can besaid that once he begins to sell short he will tryto limit his short selling (depending on theprice of the stock) to within a two-to-five pointrange. Once he halts his stocks advance,demand soon thereafter begins to dry up.5)When this happens, the specialist is in aposition to begin the movement of his stock’sprice toward lower price levels.6)As his stock declines from the high, he mayencounter heavy public selling. He can thenuse his short sale position to absorb thatselling by covering his short sales.

You must reconcile yourself to the fact (andlearn to exploit it) that the specialist is able tocontrol both advances and declines throughthe use of his short selling.Nothing revels the specialist’s inventoryobjectives more conclusively than the manner in which price is used to influence volume.Most investors take no account of theimplications of different volume characteristicsthat exist in one stock or between one stockand another. To the average investor theprice of the stock is all that matters. To thespecialist, however, the function of price is theintercourse it has with volume. A stock’svolume characteristics, therefore, are themeans by which the investor may determinethat a change is taking place or about to takeplace in that stock or in the internal character of the market.The higher the specialist advances the priceof, 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 toproduce for his stock. If the specialist raisesthe price substantially, he will also expect toincrease volume materially. Once again wecome to the conclusion fundamentallydifferent from that now held by investors, (IE),

it is not demand that causes rising stock prices,

but instead it is rising stock prices that causedemand in a stock.

It is the demand that resultsfrom rising prices that enables the specialistto unload the greatest portion of his stock atthe most profitable price levels. The exactreverse would, of course, hold true in thecourse of a decline from the $90 to $60 pricelevels in a stock like Lehman Brothers. Thespecialist would be able to accumulate thegreatest amount of stock as his price declinesto the $60 level.During those rare moments when investorsdo think about the rise and fall of stock prices,their beliefs are, naturally, opposite to what isactually the case. Thus they consider it to bea bad thing when stock prices fall on heavyvolume and assume the decline is temporarywhen it is on light volume. What the investor must recognize is that rather thanforeshadowing lower prices, heavy selling“

ultimately

” causes prices to advance. Whenspecialists trigger heavy public selling they of course are buying. Since they will not wish tocarry this stock to lower price levels, therebyincurring a loss, they will advance stockprices in order to unload this inventory at aprofit.

It is only when they are able to decline onlight volume that they can afford to carrythe decline to lower price levels

. If for instance, the specialist in Lehman Brothers isin the process of dropping his stock from $90to $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 thisinventory. Having completed this, he can thenproceed back down through that sameterritory to the accompaniment of lighter selling and lower volume.Thus it is the specialist’s objective to raiseand lower prices on light volume until hereaches the price objective at which hewishes to see heavy volume. It is for thisreason that the appearance of big blocksconsistently 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 incursheavy selling at, say the halfway point towardhis downside price objective, that volume willmanifest itself as big blocks, at which point hewill invariably reverse his direction in order torally his price in order to unload thatinventory. When he does this, big blocksagain define the upper limits of the price levelat which he will once again reverse the trendin order to resume the decline. Big blocks atthe tops and bottoms of all moves becomelarger and more frequent depending on theduration and amount of the move.As you advance your knowledge of thespecialist you will observe that in the courseof a major rally or decline, volume willincrease as stocks move toward or justthrough what I call their “

critical numbers

.”Big block activity is localized around priceslike $20, $30, $40, $50, because of the wayexponentials of 10 are charged in theinvestor’s mind. The point of this is that theinvestor’s perception of his environment andhis response to it are quite often ruled bycompulsion to conform his activities to sets of numbers in terms of the manner in which thedecimal system has come to influence him.In short it is precisely for this reason thatspecialist’s have learned that there is acertain predictable pattern investors follow inbuying and selling stock and that this patternis based on the legacy of what is referred toas the “

numbers theory

.” The evidence of this is the striking volume patterns that tend tooccur at the multiples of 10. Thus specialiststend to base the manner in which theymanipulate their stock prices on the mostordinary of plots, (IE), that if a stock isdropped from say $70 to $60 of the investorswho sell that stock during the decline, thegreater percentage will sell at or near the $60level than anywhere between $70 and $60.Investors naturally have no idea that thereason the impulse to sell at $60 is muchstronger than at $65 is that they are doing the

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