When the Institutions Are Buying

It is important to remember that the markets (and by “markets” I am talking about the stock market, bond market, foreign exchange market, futures markets and others) are moved by the “big boys”. The big boys are the institutional players who have hundreds of billions or even trillions of dollars under management, such as pension funds, hedge funds, sovereign wealth funds, mutual funds and ETFs. When these big boys decide to buy something, they have so much money, that the price of whatever they are buying moves higher. As a small investor (and even if you have millions, you are a small investor on the scale of the overall stock market) it is a mistake to get manipulated by the timing of the institutional buyers.

Shares are only available to buy if someone is selling. Price has to move higher when the institutional players are buying because they quickly buy all available shares and have to find more. For example, when a big boy is buying stock in a company at $15 per share and they have bought all the shares being offered at that price, they have to raise their bid to $15.10 to entice some more people to sell. After buying those shares, they must raise again to $15.20, and repeatedly higher until they have bought all the shares they need.

These large institutions are constrained not only by their large positions but by the fact they are bureaucracies. They tend to reposition their portfolios on a convenient time frame. This is based partially on their requirements for reporting results on specified time frames and as a convenience for them. They make their trades, adjusting their positions, for what they think will happen in the next month, quarter, year. On the days when they place their trades the volume is much higher than the average. If the big boy institutions are buying on one particular day, on the next day, the demand (buyers) isn’t there, and the price will be lower than the previous day.

If we look at a chart of the first days of March 2017, the monthly adjustment these large institutions made is obvious (green arrow). This chart shows us the price changes and the volume of shares traded:

Spy Chart March 2017

The volume indicator at the bottom of the chart (orange arrow) shows us that on March 1st, 2017 149 million shares of the S&P500 ETF (symbol SPY) were traded and a day later, only 79 million shares were traded. (SPY is only one possible security that the large funds were buying on March 1st. I am using it here as an example.) Large positions were taken on March 1st and on March 2nd, there were far fewer buyers.

If you were watching the markets on March 1st, there are a couple of behavioral mistakes you could have made. You may have either gotten excited about the stock market going up and wanted to buy more, or gotten nervous that you are missing the move and wanted to buy more. Buying on March 1st would have been a mistake. The price came down on March 2nd. So much so that if you bought at the high price of the day on March 1st (240.3) then at the close of trading on March 2nd (238.46) you would be down $1.84 per share or 0.8%.

On March 1st, the big investors were buying that day and driving up the prices. If you control your emotions and wait to buy when the price falls back down a bit, you will be able to buy at much better prices and will not be manipulated by the actions of the big investors.

 

When the Institutions Are Buying
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