Pump up the Volume

Today's promoter quote for the dissection table:

"up almost 8% on less than 4K traded? Took 40K to take it down that much"

The implication being that it is taking much more effort to move REFR down than it does to move it up.

The thing is, despite the attractive logic of that point of view, anyone with experience in the market will tell you that that is completely bass-ackwards. Why is that?

Think of it in these terms. Higher volume on downtrends means that the sellers are more enthusiastic with their selling, than the buyers are with their buying.

The divergence comes from one's perspective about what the motivation of the selling is. Now, normally, one would tend to think that the motivation of a sale is straightforward: the price one can get for the stock is higher than the seller believes the stock is worth.

Ah, but things are never that easy in the world of the Type 3 investor. From the Type 3 perspective, the notion that anyone could believes the current price is worth selling at is absurd. Why? Because they themselves paid much more for the stock! Remember that a Type 3 investor is allergic to admitting being wrong. Therefore if REFR was a buy at, say, $10, it cannot possibly be a sell under $6. The fact that the price remains over 400 times revenues (not earnings), or any other numerical argument that REFR is not worth anywhere near its present market capitalization, means nothing to them.

So why, you ask Mr. Type 3, is there selling at this level. Why, manipulation, of course! Refer back to my post on the task facing our four hedge fund investors, and then turn it on its head. Portray it instead as the shorts being on a very long-term project of escaping a large short position by selling to attract other selling, then buying back into the decline, and you have the perspective of the Type 3 investor in a nutshell.

So what's wrong with that, you might well ask. Aren't the arguments symmetrical? Well, no, not quite. For one thing, it's a lot easier to talk someone into buying on a rally than into selling on a decline. This is because there's a little of the Type 3 investor in most everyone. Buying, especially adding to a position, is an reaffirmation that one is right. Selling at a loss is a confession to having been wrong. Who wants to be the pessimistic seller, when you can be the optimistic buyer?

Another big assymetricality comes in what the industry refers to as the "uptick rule". This rule, a holdover from the 1929 crash, essentially states that you can't drive a stock's price down with short selling. The precise mechanics of the rule vary from market to market, but the gist of it is that if a stock last traded at $5.45, you can't fill a short sell order at $5.40.

So how is downward manipulation supposed to work, then? This is where things start to get a bit silly. The idea is, that the short sellers hold a substantial number of shares long, in accounts seperate from their short positions. (For a time, the promoters even referred to these as "illegal long accounts", as if there was such an animal.) They then dump these shares on the market, to improve the value of their short position. Simple, huh?

This is why the promoters get all excited about uptrends coming on lower volumes than the downtrends. From their point of view, the shorts expended 40,000 of their shares in driving the price down yesterday, but were only able to buy 4,000 of them back before the price got back to where it was before. At this rate, the theory goes, the shorts will quickly run out of shares to dump in such a manner, and there will be nothing left to keep the stock down ever again.

Multiple years of fruitless waiting for the shorts to "run out of shares", never seems to dissuade the touters of this theory of the markets.

And all the while they play right into the hands of the real players in the market of REFR, who are selling, not buying, large positions, and happily scooping up the money of the marks just as fast as it can be laid out.

Welcome to Looking-Glass Land, Alice.