Wal-Mart (WMT) is another classic example of how different issues are used to control the Dow. Wal-Mart has been advancing even in the midst of the recent decline. When the issues that have recently declined begin to advance Wal-Mart, Home Depot (HD) and Disney (DIS) will all be distributed and shorted by the Designated Market Makers in those issues. In Fact, I believe that those operations are well underway. They may actually trade sideways for a while to give the "first class" passengers a chance to get off the gravy train before the next destination which is a town called Lower.
I believe that the 2,201,830 share trade on June 1, 2012 was a major merchandising stance being established by the Designated Market Maker in his issue. It has all of the elements which are indicative of insiders wanting to free up capital because they know with certainty that Wal-Mart has had its run. In essence, Wal-Mart will be going nowhere but down for the short to intermediate term. I will be looking for additional distribution and shorting along this broadening top.
For the next 3 - 6 weeks, I suspect Wal-Mart will for the most part trade sideways until the orchestra conductor taps his baton and the symphony is underway. Wal-Mart and the other issues I mentioned will be used as a counter weight when they advance the Dow.
It is important to understand that Wal-Mart and the other issues I have written about will most likely be dropped prior to the advance. That is what I call the set-up. The impact on the Dow will be quite exaggerated and the exchange will exert tremendous pressure to induce panic selling. The media and every "competent authority" will be using buzz words like "run for cover" and every kind of subliminal suggestion imaginable to get people on the wrong side of the trade.
Investors should not underestimate the power of the media; news is the ultimate trump card in the exchange's repertoire to move markets quickly. Designated Market Makers and other insiders do not want the investing public to participate profitably. They have one and only one objective in mind: To take it all and leave the investing public with little more than bloody stumps. It is a zero sum game. Their motto is "trespassers will be shot and survivors will be shot again." Amazingly enough it is one of those rare instances where hostile intent is devoid of hostile feelings. It's a big boy's game and everyone has sharp elbows.
For the moment let's focus on Fundamentals.
Question: What has changed which will have the impetus to cause a slide in Wal-Mart?
Answer: In a word, nothing.
Wal-Mart is still the 800 pound gorilla in the room, they still pay a dividend, global expansion is being effectively executed and they have sound management with good vision. Were these not the reasons given to explain the advance? Perhaps that was a rhetorical question but it does illustrate the point that Wal-Mart should continue to advance. So why do I expect to see a decline?
The answer is actually quite simple. Once the Wal-Mart Designated Market Maker has completed the distribution cycle of his merchandising operations, he does not have a vested interest in seeing the stock continue to rise; therefore, he shorts, lowers the price, covers his short positions and engages in the accumulation cycle of his merchandising operations. If it confirms anything it shows that earnings reports and standard fundamentals are not the only agents of change for stock prices. Nothing human is without self-interest. Therefore, it is logical to conclude that the Designated Market Maker will act in a way that will benefit and maximize his own investment positions.
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On the Basis of the foregoing these are my views and observations:
The Trade:
I recommend establishing a short position in Wal-Mart. Open your position with only 1/4 of whatever capital you intend to commit to Wal-Mart at $67.07 (or above). Purchase the remaining 3/4 of the position at $72.44 and stop out at $75.28. 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 a downside price target of $61.70. 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 short position in WMT over the next 72 hours.
