Investor Spotlight

Sunday, May 19, 2019

Follow the Institutions

The hard - to - believe Great Paradox in the stock market is:

"What seems too high and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower."

By William J. O'Neil (founder of Investors Business Daily)

Institutions like hedge funds, mutual funds and pension funds are the power houses in the stock market. They are the ones that account for over 75% of the daily trading volume in the stock market. When they decide to bail out of the stock, we as retail investors better listen to what the stock charts show and just get out of the way before we incur massive losses that makes it hard for us to recuperate from. In the same manner when institutions decide to accumulate the shares of a stock of their choice, you better learn to read the clues they send out like increasing volume and increasing price of the stock. One very clear case to highlight this concept is to look at the price performance of 2 well known retail stocks - $JCP and $AMZN. Looking at the weekly chart of these stocks, you find that $JCP was peaking at $87 on Feb 19th 2007 while the upstart $AMZN was barely trading at $42.

Fast forward to May 3rd when $QQQ the leading growth stock index that I monitor was peaking at $191.25. It corrected -4.30% in the last 2 weeks and currently is being supported by the institutions at the 50 day sma(simple moving average). $AMZN retraced -4.74% in the same time period and is trading between the 20 day sma and 50 day sma. $JCP on the other hand retraced -15% in the same time period and has been trading under the 200 day sma ever since May of 2012. Currently it's trading at $1.14 with no institutional support.

Ouch! ouch! ouch!

That is a very clear sign that the institutions prefer to own the shares of $AMZN instead of $JCP. We as retail investors of growth stocks ought to do the same ... follow the institutions lead in the market.

There is one more story that the stock charts of these two retail stocks is telling us. While $JCP has been dying a slow death since May of 2012 when it sliced n plummeted below the 200 day sma, it has continued to hit lower highs and lower lows with no end in sight. The stock has plummeted -98.69% since it's all time high of Feb 19th 2007. $AMZN on the other hand continues to post higher highs and higher lows except when the market corrected over -20% from Oct 2018 to Dec 2018. The stock has gained +4450% in the same time period as of Feb 19th 2007. That is the power of institutions and a very clear message to us as retail investors that we should pay attention to.

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