The Ney Model

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Richard Ney's model for stock market trading is quite simple: Buy what the specialist buys, and sell what the specialist sells. As he says in The Wall Street Gang, "I align myself with the specialist as he seeks to solve his inventory problems."

Simplicity personified, in theory! But it's a whole different ball game in practice, because you have to infer his dynamics from properties of the market and use indicators of future market action based on the properties. This itself requires a model, a way of looking.

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The ticker tape, as you may know, is a running account of stock market transactions, giving the stock ticker symbol, price, and number of shares of successive trades. Ney uses this data as a predictive tool -- an indicator not only for what a stock is likely to do in the immediate hours ahead, but also what it's likely to do for the intermediate and longer term, even a year or so.

To show how the tape might be used, he provides insight into three areas of importance:

1. How analysis of a stock's short, intermediate, and long-term trends combine to reveal the specialist's future objectives.
2. How the theory of numbers and the concepts involved in this theory provide the investor with a key to the operation of the specialist's merchandising strategies.
3. How analysis of specific Dow stocks enables us to predict the trend of the Dow.

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The ticker tape is essential, says Ney. But:

He says it's dangerous to believe you can take a stock's price trend and project it into the future, because the specialist uses existing investor techniques to mislead. This compels the specialist to change the trend in some way to gain the element of surprise needed to make his manipulations pay off. "As he moves from one phase or price level to another, however, his inventory objectives begin to reveal themselves in terms of specific trends."

For long-term trends, though, you pretty much have to rely on the charts, because the ticker tape won't help you.

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The specialist's objectives can be classified in terms of three trends:

1. Long-term Trend: This trend lasts on the order of years. Long-term trends have their origins in the specialist's desire to accumulate and distribute stock profitably over the years for accounts of his direct interest.
2. Intermediate-term Trend: Operating within the long-term trend, this merchandising mechanism can last from weeks to several months or more. Short and intermediate term trends are created to solve inventory problems in the course of moving prices in the direction of a major trend.
3. Short-term Trend: This can last from a couple of days to a couple of months or more, and it can contain even shorter term trends that can be up to several hours long. Short-term trends are a way of solving day-to-day inventory problems, while keeping longer objectives in view.

The overall trend picture is more complicated, however. For more details, see trends.

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Ney identifies six categories of indicators one might apply in trading:

1. A gradual advance in the Dow average to the accompaniment of low or medium volume, followed by a sharp increase in the Dow and overall volume. This indicates the market has become vulnerable to insider short selling.
2. A sharp advance in a stock of one or more points on a large increase in volume. Indication: The stock may be highly vulnerable due to insider short selling.
3. A decline in the Dow average on light volume, followed by an important increase in over-all volume with a sharp decline in the Dow. Indication: Insiders are accumulating stock for investment and/or trading accounts.
4. Big blocks [relative to normal] at or near a stock's high. Indication: Specialist short-selling is under way.
5. Volume of Dow Jones Industrial Average stocks on upside and downside in excess of [a variable number shares, relative to normal]. Indication: possibility of a reversal of trend over the near term.
6. Important increase in volume as a stock penetrates an important downside price level (or pushes through on the upside). Indication: Over the short term a rally (or decline) will occur so the specialists can dispose of (or re-accumulate) inventory. Rally (decline) can be short or intermediate terms.

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According to Ney, an analyst using charts can obtain from the past behavior patterns of a specialist an indication of his behavior pattern in the future and predict what a stock will do.

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