Have you ever wondered how Wall Street’s insiders are able to legally manipulate the stock market for their personal gain? I do. And I believe to see it in action, all you have to do is look at the performance of semiconductor stocks over the past year.

On March 20, chipmaker Micron (NSDQ: MU) released its Q2 results. Those numbers were in line with Wall Street’s muted expectations. In addition, the company provided forward guidance that implies rising demand for memory chips over the remainder of the year will alleviate the current glut.

Shares of Micron jumped 8% the next morning, fully recouping all of their loss since last October. MU’s round trip from and back to $44 included a brief foray below $30 in late December as shown below.

So, if you bought MU six months ago, you broke even. However, if you bought it three months ago, you’re already sitting on a 50% profit!

Timing Is Everything

The analysts that are now hastily revising their profit forecasts upward for Micron (and the rest of the chip sector) are the same people that were predicting dire consequences in 2018. Last year, they said a glut of chips would drive prices so low that many chipmakers would become unprofitable.

As you might imagine, that sent share prices tumbling. After peaking above $60 last June, MU lost half its value over the next six months. For Western Digital (NSDQ: WDC), the effect was even more pronounced. It fell to $35 in December after trading above $90 nine months earlier.

Okay, so memory chip stocks got slammed last year. That happens. As many folks believe, when it comes to the stock market, timing is everything and nothing is certain.

Model of Excess

The reason most of those stocks took a beating is the pervasive use of discounted cash flow (DCF) models to determine fair value for a company.

As the term implies, a DCF model makes assumptions about future revenues and profit margins. Then, it makes an interest rate assumption to discount those future profits to the present from which a stock price for the company is imputed.

That means a downward revision in future revenue and/or profit margins pushes share prices down, such as occurred last year to Micron and Western Digital. An upward revision to either or both of those variables pushes share prices up, as occurred last week.

There is nothing inherently wrong with revising DCF models as new information becomes available. In fact, that’s what should happen. As new data emerge, old data get replaced.

However, when those DCF models are revised based on expectations of future data that are not yet empirically provable, their output is less valid. In some cases, considerably so.

Opportunity for Mischief

It now seems likely that the current memory chip glut will turn out to be nothing more than a temporary imbalance in supply and demand, and not a permanent situation. If so, then the affected stocks should drop in value to reflect a few quarters of diminished profits and then recover.

But for some of them to lose half their value (or more) in such a short period strikes me as excessive. That’s because a human being is rational and knows that supply gluts eventually dissipate, but a DCF model is mechanical and simply extrapolates current assumptions indefinitely into the future.

Because of that, tweaking one of those assumptions magnifies its impact on a stock’s current value. For example, last August a major Wall Street investment banking firm downgraded the entire memory chip sector citing concerns over an impending glut in supply. One week later, the chip sector had fallen 4% while the overall stock market was flat.

For that reason, the analysts that run those models need to be careful about making major changes to their assumptions. A lot of money can be made (and lost) based on the self-fulfilling nature of their pronouncements.

Coming up Short

In particular, short selling has become popular with a growing cadre of professional traders since it is difficult to prove market manipulation. As long as they all act in unison, it isn’t difficult to temporarily drive a stock price downward.

All they need is a triggering event, such as an analyst downgrading a sector based on revised assumptions, and within a few weeks a big profit is in the books. Almost nobody knows exactly when an analyst may decide to change one of the assumptions in their DCF model.

However, it is becoming increasingly apparent that some people either know, or are extremely good at guessing, when that will happen. In several instances, there has been a pronounced increase in short selling and/or buying put options shortly before these changes have been made public.

Prior to the chipmakers fall from grace last year, we saw a similar pattern with retail stocks.

In that case, analysts decreased their revenue and profit margin assumptions for many traditional retailers due to the perceived threat that e-commerce giant Amazon.com (NSDQ: AMZN) presumably posed. To hear them tell it, nobody would ever venture out to a store again because Amazon could deliver the world to their doorstep.

Except, that isn’t what happened. Take a look at this chart of the benchmark SPDR S&P Retail ETF (XRT) for 2017.

Look familiar? As you can clearly see, the retail sector took a beating over the first eight months of 2017 just as chip stocks got pounded last year. Savvy investors that loaded up on retail stocks at that time reaped a 20% gain over the next three months. And those that bought call options on the XRT more than doubled their money.

If history repeats itself, the chip sector should be fully recovered before the end of this year. And after that, who will the folks that run the DCF models choose to beat up next?

I don’t know, but my colleague Jimmy Butts, chief investment strategist at the trading service Maximum Profit, has devised an investment system that beats the Wall Street insiders at their own game.

When you learn about Jimmy’s system, it may not seem legal. But I assure you, it’s fully within the letter of the law.

Jimmy has put together a presentation to show you a way to hack the stock market. Over the last year, he has used this ingenious method to get away with $37,000.

Want to know how Jimmy does it? Click here to find out.