Found this gem on RB:
a must read The savvy long-term investors never chase stocks up. For the most part
that is momentum players and daytraders where most of it or what follows
is dumb money. Instead the long-term investors use a couple of simple
strategies in order to position themselves. One is to find a stock no one
immediately sees has huge potential and accumulate. Long-term investors
are not interested in trading against the public mind or the dumb money.
That's where the majority of the money can be made but even more can be
made if the base of a stock is held extremely strong by investors. However
the second is not to doubt the research which is the underlying basis for
going long and holding.
More and more investors are winning the game nowadays despite all bashers
that float through the Internet that has become part of the game. Floor
traders of market makers often watch CNBC, news wires and bulletin boards
in order to follow the market during trading session. OTC BB market
makers (MMs) don't use fundamental and technical analysis. However, what
they do realize is a lot of dumb money does use this newest nitch charting
or TA (Technical Analysis) to run a stock either up or down. To the MMs
this is like taking candy from a baby. Simply they will paint the tape and
use whatever tactic to affect the charting bands. Thus the public and dumb
money they will have eating out of their hands. Effectively the MMs can
show a strong stock growing weak by manipulating the close price in order
to generate selling volume, delaying trading time to manipulate trading
activities, or even stalling the ask without honoring orders to hold a
stock price.
MMs follow a simple code of business when making a market in a stock
especially an OTC BB. That is the level that stocks will seek that yields
the most volume. Now this is very important because they make money on the
volume buying at the bid and selling at the ask. In other words, by
making the market they are buying low and selling high. Now smart money
adheres to that rule, so do all the market makers. They could careless
whether the stock is at $83 or at $0.23. All they care about is the action
thus being able to sell stock at the offer (The high) and buy stock at the
bid (The low). To increase their profitability, they make the spread as
great as possible on as many shares as they can especially if the volume
falls off.
When they have mostly all "buy" orders, that's not the price that's going
to yield the most volume. They need both buy and sells to get the maximum
action. Remember, MMs play the volume. If the volume decreases and there
are mostly Buys that become a one way volume, Buy volume. So what they do
is let the stock run up to a price where it runs out of steam. They fill
all the buy orders there that they can and then comes the pullback one way
or another naturally or induced. During the pull back they can buy tons of
shares and flip them to those averaging down or trying to catch the
bounce. At some price, the stock will be relatively stable and yield the
most volume. Now that is the average price you will see
The average price is the point where a stock seeks a level where MMs can
profit on the most volume. So during the day that is the price that MMs
and momentum/day traders want to see the stock at. Why? Because they know
the public and dumb money was chasing the price thing up.
Most of the time, the MMs love a flurry of Market Orders which is a dead
sign of an artificial run or momentum. Merely it is money in the bank for
them. Most get hung in a momentum or day trade or by the tactics of Market
makers, who are in the business to screw the public every chance they get
and the NASD is not going to do anything about it. They are merely making
the market liquid is there reasoning.
The market makers have created an added complication to the OTCBB's chaos
of the already volatile intra-day price movements created by dumb money,
momentum and day-traders. MMs can not relate to long-term holders in the
OTC BB. That makes absolutely no sense what so ever. They feel a large
percentage of trades in the OTC BB market consist of short-term or
day-trades, MMs merely view the barrage of buy and sell orders as
relatively neutral to the market. How they figure it is when the average
dumb money buys shares in a company, the MMs feel or rather know with some
certainty it is very likely that dumb money will want to sell back those
shares relatively quick on the slightest drop.
Now somewhat comfortable with this logic the MMs merely short sells into
the buying and attempts to take the stock down in an effort to "shake out"
the weak. Since it is tough to know for sure whether a move is the
beginning of a trend, or a routine shake out, this type of deception works
quite well for the MMs. What the long-termers do to a stock is surprise
the MMs because instead of falling the shorting has no effect and the
price goes up. Now that puts the MM at selling low through shorting and
thus having to buy high in order to cover.
Boy, when this happens, the MMs are not very happy campers. The investors
and traders are supposed to be doing that no them. Now it becomes time
to pull out every trick and tactic in the book in order to attempt to get
a Bear Raid at every dollar mark or percent from where the stock started.
Could be a penny in smaller priced securities? What MMs do is give you a
chance to make a small amount of money for your momentum and day trading
style by shorting it at these levels and trying to get a bear raid each
time. Each failure is compounding the MMs short position so they let it go
to the next level. Now come more deliberate tactics MMs use to coerce Bear
Raid or panic selling.
Once the MM is caught short and the strength of the buy is overpowering
the MM will want to cover his short position. So the MMs call up one of
his friendly MMs and says some like "the weather is sure rough today."
The MM along with the other "friendly MM initiates a down tick about the
same time. Now this can also be done with a certain amount of shares such
as an infamous 100 shares flag. This down tick gives the illusion of
weakness designed to hopefully begin the bear raid of selling. The fickle,
fearful, day trader, momentum and short term begin to sell out allowing
the MM to cover his short position at lower prices. They will move it down
quickly to get it to a price of least financial damage. Problem they have
is long-term investors in the OTC BB. They start accumulating and buying
comes flying in when they take it too far thus the MMs took it to the
point of volume again and not only investors the other MMs step in the
make money on the spread.
Alas the poor MM does not get to cover. Now comes various tactics like
stalling, boxing, or even locking the Bid and Ask for a while.
Of course, MMs aggressively deny any sort of collusion designed to fix
quotes or spreads, but a recent SEC investigation tells another story
which they released on January 11, 1999.
sec.gov
MMs have a vast resource of tactics and it would take probably more than
my lifetime to figure them all out.
So how do investors somehow manage to overcome the obvious deception in
OTCBB arena? One answer is indirection trading style by going long which
the MMs do not expect. In the war between investors and public companies
on the OTC BB vs the MMs, if the MMs have all the advantages due to
position or other factors, direct confrontation such as momentum or day
trading hitting the stock is a definite death sentence.
However, an indirect approach tends to weaken the path of least resistance
before slowly overcoming it. The most effective way is long-term investors
slowly accumulating and holding thus drawing the MMs out of its defenses
making them as naked as their short position. This is war so this slow
accumulation and holding for the long term easily achieves the desired
effect to force MMs to cover and knock off the tactics or bury themselves
deeper.
The MMs when caught will especially use every trick and tactic in the book
to get a Bear Raid thus playing on the individual fear of most people. The
MMs feel they have information and position advantages over the investors
as long as the holding of the stock is in weak hands or short term
holders. Since they are OTC BB MMs who believe all OTCBB companies are not
worth investing and management is ineffective regardless what is happening
within the company. Furthermore, MMs know they are in the position to
impose a great deal of influence in OTC BB stocks trading when it suits
their needs.
This inherent power of position enables the MMs to move the markets at any
time up or down. As a result, the only way to draw them out of their
favorable position is going long. Now this does not mean just any company
but to effectively nail the MMs, Longs must find the great company on the
floor and accumulate long before the MM tactics and games begin.
This requires extensive research to find such a rare stock, but once you
have found it, you are one up on the MMs so be prepared for every tactic
in the book.
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Steve |
