Sunday, March 1, 2009

Buying of Stocks Does Not Send the Price Up

The Nightly Business Report on PBS commissioned a study on the 1987 crash that took ten years to complete. They determined that there was net buying of stocks during the more than 30% decline in the Dow and S&P500. Therefore, stocks fell by one-third while there was more buying than selling.

Most people think that 'for every buyer there's a seller', which is not true. There's a portion of every company's stock that is unowned, called the 'public float' - technically not owned by the company or any individuals. The market-makers (called 'specialists' on the New York Stock Exchange) can buy or sell from this float, from their own inventories (and therefore move the price up if they want to sell their own, down if they want to buy more), or can simply match a buy order with a sell order of the same price, called crossing the trade. Ironically, these crossed trades do not have to be included in the daily trading volume reports, it's up to the mm's discretion. So if a big fund wants to sell 10 million shares of GE, and someone else wants to buy them, the shares may get reported in the volume or not; I'm not sure the rationale behind this, seems like even a big transfer of 500 million shares should be reported to the public.

Volume issues aside, the NBR study proved that the price tail wags the volume dog, or they create trading volume by changing the prices a lot. They raise the price a lot, it will generate selling (greed wants the profit), they lower the price a lot, it will generate buying (bargain hunters see a temporary sale). So the mm's can get the public and many others to sell by lowering prices, those who want a bargain will now buy, and can continue buying as long as we're selling - they have more money than we do. Conversely, when they want to sell to us, what better way than raising prices, getting us to buy something rising in value, while they sell the shares they bought when everyone was selling. Remember, these are big, multi-billion dollar firms, and old adage is "Wall St can stay solvent longer than any of us", or they can ride out a downturn while collecting stock at cheap prices, and we can't; we'll sell out for a loss and wait until prices are rising again before buying.

This is how the market works. There are some good films that show you the harshness of the insiders, how little they care for the public:
Wall Street - based on the story of Ivan Boesky, a takeover artist
Boiler Room - the story of a brokerage that pushes worthless stock to unsuspecting public customers
Rogue Trader - the story of the Barclay's Bank trader who lost that firm billions, and bankrupted one of the biggest banks in the world

The important thing to remember is that even in a bull market, over 60% of all stocks still go down, and that statistics show that about 80% of all stocks (most are very small) will go bankrupt over 10 years. The S&P500, though representing most of the capital in the market, is only 500 of over 9000 publicly traded stocks, half of which are worth less than 100 million each.

The market insiders also use the averages to send a message to influence policy: if a President says something they don't like, down it goes; he announces a policy favorable to the market or big companies, it'll likely go up. This is hardly economic or politicaly reality, it's basically manipulation by those in collusion to invoke their own policies by manipulating our wealth.

Never risk money you can't afford to lose, be skeptical of all you hear, for the insiders are selling stock to us for a reason, else they would keep it all themselves.


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