How it works

This process can be used by hedge funds to either pump up a stock or to trash a stock but since I am using Herbalife as an example, we will discuss that situation. First information is widely distributed to make investors wonder about the company and to put fear into those longs that hold the stock. Next, high volume shorting takes place to drive the company's share price down.

As the short attack continues, more people parade out news to continue to put questions in the back of investors' minds. On a daily basis, shorts use computerized trading to control the direction of the share price. At opportune times, the shorts overwhelm the buyers (bid price) of the stock by selling short large number of shares to drive the share price down and to eliminate the buyers for the stock at that given time. For people who are not familiar with the bid/ask process of trading stocks, here is a link to explain that process.

Shorts need to control the stock's share price over a long time (often several months to well over a year), and can't afford to just accumulate an unlimited number of short positions in the stock, so they have to be buying shares at the same time they are selling shares too. When the shorts drive the share price down, eliminating buyers as discussed above, some of those investors trying to sell their shares at that same time will follow the share price activity downward lowering their ask price.

Now the shorts can buy back some of the shares they have shorted at lower prices including some shares where longs have put stop-loss sale orders to protect against downside losses. The shorts will only buy shares part of the way back up as the share price rises, and then wait to see if new buyers come into the market. If the share price continues to rise up to much again during the day, the shorts will repeat the same selling and buying process to control the share price.

As mentioned above, the shorts need to control the share price over an extended period of time. They need to wear down the longs with rumor mongering as well as by creating fear as the longs continue to see the share price go down from the computerized trading. They hope the longs will give up and sell their shares at the lowest possible share price.

Another observation, shorts try to wear down the longs by making sure that the share price closes down as many days in a row as they can put together. At the close of each day, I witnessed volume dramatically increasing as the shorts tried to insure Herbalife's share price closed down. Shorts are hoping the longs frustration with the share price continuing downward will end up in capitulation where as many longs as possible just give up and sell their shares.

I don't know how low the shorts will drive the share price of Herbalife during this current short attack, but I do believe Herbalife is a strong good growing company. As with all false short attacks, the share price will bounce back. After the share price bottom is reached, I expect the shorts to continue their rumor mongering so they can continue buying to cover their shorts as the share price rises back up.

Since Herbalife is already in its 5th month of being attacked by shorts, and if history repeats itself, anyone buying shares of Herbalife (HLF) at this time should be in for some nice gains over the next 6 to 12 months as Herbalife's share price rises back to and above where it was when this short attack began. The shorts greatest fear is that people will figure out their lies too soon, and the share price will rise up too quickly. I think there is a good chance for that to happen as a lot of people will be learning more about this scheme.

Also I have to believe this manipulation has to involve collusion between all the major players in the Herbalife short attack since it wouldn't work like it has if they didn't work together. If one or more of the major short players decided they didn't want to participate further in driving the share price down, and decided to buy to cover, this would create a major problem for those other major short players. The remaining major short players would not only have to drive the price down based on selling shares to new longs but would also have to sell shares to those other major short players buying to cover their shorts. The remaining short players would not be able to manipulate the stock share price as easy as they did working together.

If you are wondering why would they short more shares even when a company like Herbalife is obviously a healthy growing company. Here is the reason. Since the shorts already have the investment community wondering about problems, introduced by the shorts themselves, concerning the company since shorts have already shorted $745 Million+ (12,422,168 X $60 per share (my guess at average share price shorts sold their shares at)) shares of Herbalife and by just adding almost $32 Million (585,409 X $54 average-?) more shares shorted, the shorts were able to take the steam out of a lot of the longs' enthusiasm over the 2nd quarter financial news, and now the shorts believe they will have a better opportunity to buy to cover their shorts at a lower price as well as they will have more time to do so. At least that's what the shorts hope for.

I believe that stock market manipulation by big players is a major problem. I know this article focuses on one stock, but just like cockroaches, if you can find one, I am sure there are a lot more out there. The only way we are going to make changes in this society is to make as many people, especially our elected officials, aware of this problem as we can. I am sure this problem steals money from the vast majority of our investments and retirement programs. If you agree with me, and you want to help me try to do something about this problem, by getting the word out, please email this article, post to facebook, twitter, LinkedIn, etc. links to this article, of my blog, to as many people as you can.