The Myth of Rational Stock Prices: How the Exchange Distorts Perception

Investing in the stock market can be a daunting task for many, and one of the reasons for this is the irrational movements of stock prices. It's not unusual for stock prices to move up and down in a seemingly erratic fashion, and yet, the public is made to believe that these movements are rational and can be explained by the laws of supply and demand. In reality, the Exchange has created a highly functional body of myths to support the concept of an auction market, which operates according to the laws of supply and demand. This not only makes it simple for the public to understand but also enables the Exchange to command a continuing series of headlines.

The Role of Price and Volume in Stock Trading

Price is often used as an investigative tool by specialists to locate volume. Volume, on the other hand, is the investor's window onto the floor of the Stock Exchange. Properly utilized, it brings the investor face to face with the specialist's attitude toward their inventory, whether they want to dispose of it or add to it and, therefore, raise or lower their price. However, because of its distortions of perspective, investors fail to recognize the dangers to which their attitudes toward price subject them.

The Problem with Investor Attitudes Toward Volume

Investors have not been properly trained to examine and understand how the movements of volume are used as an indicator of change. Instead, they believe that high volume in the course of a rally is proof of the "market's underlying strength." In fact, the very opposite is true. Volume is either a manifestation of specialist accumulation when it is on the downside or an indication of specialist distribution when it occurs on the upside.

The Importance of Specialist Short-Selling

Since specialist short-selling is an aspect of specialist distribution, an understanding of the volume of specialist short-selling is fundamental to an understanding of the specialist's intent toward their processes of decline. The only assurance the investor can have that a limitation has been placed on the market's downward process is that the decline is generally directed proportionate to the specialist's inventory of short sales. In other words, how severe a decline will be in a stock depends on the extent of the specialist's short sales and how well they conserve them.

The Myth of Rallying Stock Prices

Rallying stock prices almost immediately after they have begun a decline is an institutionalized system for unloading the first batch of stop-loss orders that are accumulated by specialists from their books. This practice distorts the perception of investors, making them believe that a stock is experiencing a true rally, when in fact, it is just a temporary adjustment for the purpose of unloading stop-loss orders.

Conclusion

In conclusion, investing in the stock market is not as simple as it may appear to be. The irrational movements of stock prices, coupled with the Exchange's highly functional body of myths, make it difficult for investors to understand what is really going on. However, by understanding the role of price and volume in stock trading, and by recognizing the importance of specialist short-selling, investors can begin to get a clearer picture of the market and make more informed decisions. It's time to dispel the myth of rational stock prices and start looking at the market with a more critical eye.