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As Markets Continue Higher, Who is Buying Stocks?

From Dorsey Wright & Associates:

S&P 500 companies bought back about $160 billion in stock in the first quarter of 2014, and are on pace for an amount this quarter that is close to the all-time high of $172 billion set in the third quarter of 2007.

In his weekly commentary for LPL Financial, Chief Strategist Jeffrey Kleintop offered the following with regard to his observations on cash flow trends within US Equity markets:
We devote this commentary each week to assessing the many reasons markets may rise or fall. But at the heart of it, all markets come down to just one thing: buyers and sellers. Taking a look at who is buying and who is selling can tell us something about the durability of the market’s performance and what may lie ahead. Currently, there are six notable trends in buying and selling in the stock market. U.S. stocks are being purchased by corporations and individuals; however, foreigners, hedge funds, institutions, and insiders are net sellers.

for blog 6.16.14

There are a few aspects of his commentary that we’d offer as extremely useful in reminding us why we approach market analysis in the manner in which we do. Firstly, we might imagine turning on CNBC and watching three different market exposes – the first of which might be titled:
“S&P 500 companies bought back about $160 billion in stock in the first quarter of 2014, and are on pace for an amount this quarter that is close to the all-time high of $172 billion set in the third quarter of 2007.”
A second program alert might read:
“Foreigners have turned to net sellers of U.S. stocks over the past year following a period of steady buying for previous 4 years!”
And a third might read:
“Pensions are rebalancing their portfolios away from stocks and back toward bonds.”

According to Mr. Kleintop’s weekly commentary, all would be completely accurate statements. Though you might imagine each “story” would be saved by CNBC for the most convenient time in which it matches what might be going on in the Dow Industrial Average that very minute. When markets are going down, viewers want to know why, and Foreign investors engaging in a tendency toward selling US stocks provides a convenient answer. Similarly, when markets are rising, CNBC is expected to have an answer for that as well. Does it help anyone make better investment decisions? Of course not, but it likely pays the light bills for a nice studio set.

As Mr. Keintop appropriately mentions first and foremost, “at the heart of it, all markets come down to just one thing: buyers and sellers.” While it makes for more media content to segregate those buyers and sellers into different factions, the beautiful reality of price discovery within the markets is that it cares not where buying and selling pressure comes from. If there are more buyers than sellers willing to sell at a particular price, price must rise. If there are more sellers than buyers willing to buy at a particular price, price must fall. The market does not care what the first language of a seller is, or what academic insignia might follow the name of a buyer on his business card. Price discovery is simply a result of imbalances between ALL supply and demand forces within the market at a given time. For this reason we follow price. There are fewer moving parts, fewer “woulda, shoulda, couldas,” and far more of “what is, is”.

The 100 point chart of the Dow Jones Industrial Average [DJIA], below, is a record of price, which is itself a record of all buyers and sellers meeting within the marketplace over time. When recorded on a Point & Figure chart, patterns and trends emerge, illustrating whether supply or demand is in control of that price development. We care much less about where buying pressure is coming from, because that could change overnight. We care that buyers are in control of the market. Today the Dow remains in a positive trend as an index, and all 30 of the Dow Industrial components trade within a positive trend on their own PnF charts. This is not a trend we choose to fight, but is always a trend to which we will pay great attention. In doing so we pay attention to the one thing all markets come down to, “buyers and sellers”.



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