Specialists: How They Shade Traditional
Thinking Versus Reality
By now the reader of these articles is surely
aware that most investors are ruined in the
market because of their failure to recognize
the causes of the market’s trends are due to a
succession of concrete and particular events,
all of which are linked to one another through
the specialist as today is linked to yesterday
and tomorrow. Isolated, the various activities
of the specialist may make no sense what so
ever. Yet systematic knowledge of the
market’s historical trends reveals that while
the specialist will be profoundly influenced by
what happens in the present, what happens in
the present or over the short term will be
profoundly affected by and runs parallel, so to
speak, with his longer term inventory
objectives.
In other words, if he establishes a downtrend
from a high today, he will begin to precipitate
public selling tomorrow. The inventory he
acquires in the course of this first decline from
a high then becomes a permanent element of
the rallies which must follow and which he
conducts in order to unload his unwanted
inventory of stocks. One can make the following
generalization about these rallies; that the insider
selling and short selling occurring at the rally
highs have a specific relationship to the
forthcoming declines from rally highs.
Insider selling and short selling are not,
however, the only determinate of the extent of
the decline. The relationship between public
selling and its impact on the specialist’s
inventories also determines the extent of the
decline from a rally high and the plan of action
that will be taken by specialists to unload this
inventory.
Inevitably as prices move down from the final
highs, the investor’s financial page will be advising
him not to abandon faith in the underlying strength
of the market. He will be told, “It is only logical
to expect some sort of pullback, or at least a
consolidation phase in the market.” The
investor’s problem will be rallies in the Dow,
which will attempt to hide the fact that the
overall market is declining sharply. On some
days the Dow may close sharply higher while
the preponderance of declines over advances
shows the market as a whole to be still
disintegrating.
Then, when the Dow continues its plunge
past the levels at which investors were
advised to look for support, they will be told to
look for support at levels that are still lower.
Then, when these levels are penetrated, they
will be told that the experts expect to find
support at the old lows. Then when some or
all of their stocks begin to penetrate their old
lows, they feel it is then too late to sell. Near
the bottom they will hold on until the media
grows pessimistic. Then, thinking he should
try to save something, investors will sell
everything.
We have seen that the investor’s
disappointments are proportionate to the
degree in which his activities unknowingly
assist in the development and refinement of
the specialist’s practices. When investor’s are
buying, on balance, specialists are selling.
When investors’s commit themselves to
heavy selling, specialists are buying. Thus the
public’s bearishness is actually bullish, and its
bullishness is, in fact, bearish.
It should now be clear that nothing is natural;
nothing is, as it seems to be. The movement
of stock prices is not the reflection of
economic law. The present and future trends
of stock prices are in the final analysis,
prejudiced by the expectations and objectives
of the Exchange establishment’s elite clique.
We have observed that the specialist’s price
movements are based on an awareness of
what he already knows will take place. In this
sense it can be said that the specialists vision
of things to come underlies and gives rise to
the 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 the
future is molded by the specialist and his
system into a highly flexible blueprint to be
followed to its logical conclusions through
time. Stock charts, which record a stock’s
high, low, and close outline the past history of
these blueprints.
Below I have listed nine traditional investor
views and compare them against my
principles for investing in the market. As
investors in the market place see where your
investing philosophy’s match up in relation to
these views, and how they relate to the
market’s actions now.
1) Traditional View: At times of recession one
should buy “defensive” issues, including
bonds. Defensive issues are, among others,
utilities, foods, tobaccos, food chain stores.
My View: 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. As
for buying defensive stocks: the only stocks
that should be bought are (A) those that give
evidence of specialist accumulation and (B)
those that serve to limit the investor’s risks
because of active institutional participation.
As for investing in bonds, I consider them to
be a high risk for the simple reasons that
bond prices are even more manipulated by
insiders than stock prices, trades are not
visible on a ticker tape, and information
concerning the transactions of insiders is
nonexistent. Bonds are an indispensable
method of corporate financing which provides
the investment banking industry with
enormous sources of income. If these profits
are to continue, the industry must condition
investors to believe that their portfolios should
at times include a large percentage of these
issues.
Naturally it is in the interest of Exchange
insiders to spread the propaganda that a
move out of common stocks and into bonds
as a “defensive measure” during periods of
recession is advisable, because investors
then sell their common stocks to these
insiders at the very time stock prices can be
expected to soon advance. Their chief
advantage to an investment advisor is that
tradition allows him to stick half of a
multimillion-dollar portfolio into bonds, thereby
cutting in half his workload and his exposure
to criticism. He is “Safe” when he loses
money in bonds since, like everyone else; he
acted in what is termed a “defensive”
manner.
2) Traditional View: There are times when it is
safer to trade that to invest.
My View: 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 and
C.D.s. Although trading on the basis of short-
term rallies can occasionally be profitable, the
risks, in my opinion, are too high and the
rewards to small to be acceptable.
3) Traditional View: Economic developments
affect public opinion, which affects stock
prices.
My View: The stock market is an internal
operation. Economic developments do not,
therefore, cause stock prices to move one
way or the other. They can and will 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 enormous impact on
economic conditions.
4) Traditional View: The Federal Reserve
controls booms and busts through its control
of the money supply and interest rates, which
in turn affects the market.
My View: 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 decline, the Fed will institute
conditions that again cause interest rates to
rise.
By lowering interest rates the Fed and banks
cause the public to move out of cash
instruments and into stocks as stock prices
move to their highs. Since the public has
been conditioned to believe that lower interest
rates cause an advance in stock prices, the
Exchange has a ready alibi to hand to the
media for rising stock prices. When interest
rates are raised to higher levels as stock
prices move to their lows, the public is
persuaded to sell their stocks and move into
cash instruments – thereby not only enabling
insiders to accumulate more shares but also
preventing these investors form profiting from
the advance in stock prices when it occurs.
By the same token, the increase in interest
rates also provides the Exchange with the
alibi it needs to legitimatize falling stock
prices.
5) Traditional View: Play a trend and get out
when it seems to be stopping.
My View: A stocks 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 selling by specialists.
6) Traditional View: Cut your losses let your
profits run.
My View: Follow this bit of folklore and, on
the one hand, you may well be cutting your
loss just before a major rally takes place,
while on the other hand, by letting your profits
run, you are assuming you can determine
when your profits are about to become
losses. 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 major gain. The time to sell,
whether you have established a profit or loss,
is when, after an advance in stock prices you
have 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 is
bearish. Declining volume on a rising market is
bearish. Declining volume on a falling market is
bullish.
My View: Expanding volume on rising stock
prices is bearish, since it indicates increasing
insider distributions, 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 much higher
price levels from those they bought it at.
Declining volume on rising prices is bullish,
since it indicates specialists are managing to
advance stock prices covertly without
attracting much public attention.
This is a strategy employed by specialists
when they have accumulated large
inventories of stock at a low price, which they
wish to dispose of at much higher price levels.
An advance on low volume, therefore, allows
them to retain the bulk of their inventories in
order to dispose of it at optimum price levels.
Declining volume on falling prices is bearish,
since it indicates that specialists will continue
to lower stock prices until their inventory
accumulations necessitate a rally.
8) Traditional View: Big blocks on upticks are
bullish signs.
My View: Big blocks on upticks 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 that they will
soon want to sell at higher price levels.
 9) Traditional View: A high short interest
number is bullish.

My View: Short selling is an activity that

makes declines in the market place profitable
to specialists, not investors. The media,
however, persuades most investors to believe
that investors are responsible for high short
interest. It is then suggested since they must
inevitably “cover” their short sales, this will
cause a sharp advance in stock prices. Hence
investors are lead to believe that high short
interest is bullish and a low short interest is
bearish. The fact is however, the specialists
only sell short when they intend to drop stock
prices. Since more than 85 percent of all short
selling is done by Stock Exchange specialists
and other members, a high short interest is a
sign that the market is doomed to a decline.

Richard W. Wendling
12/09/07

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