On March 14, 2012 Procter & Gamble (NYSE:PG) was at its 52 week high of $67.95. It should come as no surprise that the biggest blocks immediately preceded and followed that date. It is important to consider and understand that the largest blocks (that is to say, the most relevant blocks) do not always occur on the days with the highest aggregate volume.
I suspect that from mid-January Procter & Gamble was extensively distributed and shorted by the Designated Market Maker. If you review the Block matrix which I included and match it against the chart which is also included you will see a correlation between the blocks at the top and the price consequences which followed. What you will not see is the short covering and accumulation blocks because that operation was performed using smaller blocks which I did not include in the interests of brevity. I try to keep these articles below 1000 words.
Procter & Gamble is not a high beta fast mover. The range between the 52 week high and the 52 week low is only $10.39. Nevertheless, it advanced and declined 7 times within the last 52 weeks with moves of 10% or better. Therefore, the price action - although not extreme - is consistent. If investors pursue consistency and traders want volatility Proctor & Gamble has something for everybody.
It is important to remember that it is a merchandising operation which has different cycles. Each cycle has a specific function. The Designated Market Makers inventory objectives are determined by whether they are heavy or light on inventory. That said, this next cycle should last between 30 and 90 days.
In war or in the market it is imperative to be strong at the decisive point. Yet it is often difficult to know where the decisive point is exactly. The Designated Market Maker floats the wholesale price level to suit his short, intermediate and long term inventory objectives for his issue. In addition, he does not allow operational developments to drive strategy. Neither should you.
This certainly begs the question, how does he accomplish this? (Read my book The Stock Market Insiders Manifesto.) For now, I will give the abridged explanation as follows:
He Has Three Strategic Advantages
There are three strategic advantages the Designated Market Maker has over the investing public which contribute to the incredible conflict of interest inherent in the present structure of the market. Each of these advantages comes from the integral role that the Designated Market Maker plays in the stock exchange.
- Knowledge of Buy and Sell Orders; and
- Power to Set Price; and
- Trades On His Own Behalf.
Knowledge of Buy and Sell Orders
Deep knowledge of the universe of buy and sell orders is one of the three strategic advantages the Designated Market Maker has over the investing public. This comes from his central position in the structure of the market. All buy and sell orders eventually make their way to the Designated Market Maker post. Some trades are done off of the exchange, but by and large the huge majority goes through the Designated Market Maker. Every stock traded on the NYSE is assigned to a Designated Market Maker post. The NASDQ has a different but similar apparatus.
Power to Set Price
The power to set price is the second strategic advantage the Designated Market Maker has over the investing public. In lieu of his deep knowledge of buy and sell orders, he is deemed to be in the best position to evaluate supply and demand. Therefore, he determines what the price should be based on supply and demand. Bid and ask prices are Designated Market Maker set.
Trades on His Own Behalf
The third strategic advantage over the investing public is the Designated Market Maker possesses the ability to trade for himself. This is of supreme importance and comes from his obligation to maintain a fair and orderly market. As part of that obligation he is supposed to keep the market liquid. When there is a rush of buy orders his function is to maintain market stability and minimize sharp and abrupt moves upward or downward by supplying this demand. This is the purpose of his trading account which functions as a miniature warehouse for each stock. The Designated Market Maker is supposed to sell out of that warehouse. When there is excessive demand he is to supply that demand from his own inventory. In addition, he is supposed to absorb stock into that trading account when there is excessive selling. That is his charter.
The potential for abuse is obvious with the Designated Market Maker's trading account and his ability to set the price of his stock. In addition, to exacerbate matters, he is allowed to maintain a segregated investment account which he trades on his own behalf. This account has no legitimate function other than to benefit the Designated Market Maker's investment positions and create wealth for the Designated Market Maker. In reality, they typically have several segregated investment accounts which include their spouses, children and grandchildren et al.
The Designated Market Maker is an investor manipulating the market to better his own investment positions. This is nothing short of Dual Trading which is prohibited in the commodities markets. Dual Trading is defined as Commodities Traders investing in commodities in which they were making markets. This is exactly what the Designated Market Maker does and why it is wrong in the commodities markets and permitted in the stock market is suspect at best.
On the Basis of the foregoing these are my views and observations:
I recommend establishing a long position in Procter & Gamble. Open your position with only 1/4 of whatever capital you intend to commit to Procter & Gamble at $61.44. Purchase the remaining 3/4 of the position at $56.52 and stop out at $54.22. Do not post your stop out. I have said it before, but it is so important that at the risk of being redundant and in an abundance of caution, I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside price target of $65.05. Do not allow this position to exceed 5% of your overall portfolio.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now…Have a nice day.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PG over the next 72 hours.