How to think about the stock market

Up one day, down the next, but is this really the way the stock market works? The answer is yes … and no! But here is one simple trick to understanding how the market works.

If we break down the investor types who operate in the stock market, you'll see mutual funds and pension funds are by far the dominant players. Institutions make up at least 75% of the volume. That makes sense since approx. two billion shares are traded every day on each of the Nasdaq and the N.Y.S.E.

Mutual funds and pension funds have hundreds of billions of dollars under management in a family of funds. That’s a lot of money for one organization and there are thousands of fund companies conducting analysis and executing transactions routinely. Many of them take a longer term approach, taking a big picture view in the management of their portfolios. Since they typically hold 150 stocks in an equity fund portfolio, the decisions they make apply to the entire portfolio encompassing nearly every sector in the market at the same time. If, for example, a fund manager thinks the economy is deteriorating, they will undertake selling a portion of nearly every stock. That may push the market averages lower.

Mutual funds do not nibble away on buys and sells. Even a small fund won’t consider a buy in a stock unless they can acquire at least $250 million of the stock. Obviously, a position of any size requires buying in incremental purchases, sometimes over a period of years.

The reality is, stocks that are heavily owned by many mutual funds can go through a long period of selling, but never effectively bring their position to zero.  

Stocks that are the most desirable will outperform nearly every other stock in the market by a wide margin as bigger positions are acquired at a faster rate. In fact, the difference in performance amongst the top 10% of all stocks in the market versus the other 90% is huge.

Thornton Wealth Strategies and Investor Boot Camp Online spend countless hours screening the top indicators to produce a short list of the most likely big winners in the stock market.

When a stock blasts higher, is it hitting a new high in heavy volume? This is a tip off big money is piling into it. They’re not day traders, so even a modest decline over a period of months is acceptable to them. There’s a good chance they’re going to start adding to their position at a time they deem strategic based on their analysis.


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