This is the beginning of an operation in which large mutual funds and investors, and people who are professional money managers and 401k plans, are starting to sell out on their positions.
Generally, this happens in a way that you wouldn’t be able to tell. In other words, this is a very subtle way of telling you that they are selling out of their shares. If you aren’t paying attention to these large one-day price drops, with the large volume, then you’re going to be sorry later on. The price, even though it may fluctuate up and down – eventually, if there is enough selling in the stock, by professional investors, this is going to drop dramatically.
In fact, if you take a look at a lot of different kinds of stocks – let’s take Starbucks, as an example. Mutual funds were buying Starbucks way back here, at the 12.50 level. They knew, and they had the research to back it up, that there was a tremendous demand for Starbucks products. At that time, they took positions at Starbucks at these price levels. They may have even been buying on the way up, to support the stock.
Eventually, there was a tremendous amount of exuberance in the stock. Individual investors, right around this area, started catching onto the fact that this stock had moved from 12.50 up to 22.50, and they decided to get on board. They started pushing the stock higher.
At this point, the mutual funds probably have not gotten enough profit out of the stock. As it sold off, they began buying the dips, and supporting the stock on the dips. Once again, the individual investors said, “Hey, I’m going to go in and buy the dips as well.” They were buying the dips.
Now there is an additional run-up of prices, and the very smart investors were buying down here in the dips. As it ran up, more and more people started to take notice of the fact that Starbucks was moving up again.
There was a little resistance level, right here around 32.50. It broke through that. In exuberance of massive proportions, the stock moved up almost 40. It eventually started selling off.
I can guarantee you that professional investors were selling into this rally. They were trying to sell as much stock as possible to the public during this rally, in order to exit the positions that they purchased back down here, when the stock was only $10.
They have to do this over a period of time, in order not to put down the price so far on themselves, that they won’t be able to get out on a decent profit. In addition to that, not only are they buying the stock at low levels and selling the stock at higher levels – in addition to that, when they do go out and sell their positions at these levels, they also engage in buying activities.
That might sound strange to you. If they want to get out of the stock, why are they also engaging in buying activities? They do that to mask their selling. In other words, prices are running up. More and more individual investors like us get involved at the stock at these very high levels, after this exuberant run here. This unnatural run of prices that get to the point where it’s almost a straight up line.
When a stock is going up every single day, and then jumping, sometimes, and gap-ing up in price, individual investors who don’t really understand what’s going on, will get in extremely late on these positions. The mutual funds are there to sell them their stock.
On the way down, the mutual funds realize that when they start flooding the markets with shares of their stock, prices are going to start dropping dramatically, like they did here. A couple of science and institutional investors are selling the large volumes here. There is one here, and there is one here.
What happens after they sell their selling activities? Prices stabilize, and they actually start going back up again. That’s because, at the same time that the mutual funds and professional investors are selling their stock, they are also supporting their stock by buying some of it back. On the next higher level, they unload even more of their stock that they bought here. They do this in order to not drive the price down, because they haven’t completed their operation of selling yet.
In other words, let’s say they took a single day, and a single mutual fund had 10 million shares of Starbucks. Starbucks only trades about an average of 5 to 7 million shares a day. Think of yourself as a mutual fund, for a second. The entire one day of trading is about 7 million shares. What would happen if you went into the market with 10 million shares to sell in a single day?
You would get an unbelievable price drop on you. So, they have to sell their shares gradually, over time. While they’re selling, let’s say they sell maybe a half million shares on this day, and they sell 300,000 on this day. The next day, they may go in and buy 100,000 shares, just to prop up the stock a little bit. They don’t want it to get too far down in price, so they can’t sell it at a profit. They actually support it by buying 100,000 shares. They just unloaded 800,000 shares, but they are going to buy 100,000 shares to prop up the stock.
Then, as it goes up, they continually sell more stock, to more investors. They continually see that someone is supporting the stock here, because it stabilized in price and it is continuing to go back up again. They don’t realize that it’s the mutual fund and professional investors that are supporting the stock, only because they want to sell more of their shares.
Eventually, at some point, people are going to get wise to the fact. There is so much selling coming into the market, because the mutual funds have gotten to the point where they have to start unloading more shares again, after they have supported the stock. Now, they start shelling another million shares, half a million shares, 300,000 shares, a couple of hundred thousand shares.
Then they go and buy a hundred thousand shares, or a couple of hundred thousand shares back. That supports the stock again. Individual investors see that the support is coming in. They rally the prices back up, and the mutual funds come in and sell 100,000 shares, 400,000 shares, 300,000 shares. “Let’s sell a million dollars today.”
Boom. There goes the price. It just drops like a rock. Once again, they have to go in and support the shares. They buy 20,000, 50,000 shares. As it consolidates, they sell even more shares.
At some point, eventually, maybe around here, where it dropped dramatically, or here, the mutual fund has completely taken off their books the shares of Starbucks they bought back when it was like 10. They have seen a tremendous rise in prices. They have now unloaded their shares to investors, professional investors, and other people who have seen this large run-up of price. They fear that they have lost the “getting it in at the early point.” Now, they’re going to buy at the highs.
Once the mutual funds start selling out of the stock… Not every mutual fund is going to sell every share of their stock of Starbucks. They are going to take the majority of their profits at this point. You know when they have stopped supporting the stock at the downside. They have sold all of the shares that they wanted to sell. Now there is absolutely no support left for that stock.
There is no sponsorship for that stock anymore. When it starts to trade down, that mutual fund is not there to buy 30, 40, 50,000 shares, every time the stock drops. Other investors are starting to realize, at this point, that they are the ones holding the bag. The stock is not going to sustain in a $40 price level. There just aren’t any more buyers coming into the market at that level.
Individual investors have already bought at these levels. There’s no professional support. In order for a stock to continue rising indefinitely, you need institutional support of that stock. You need someone who is in there buying that stock, in 10, 20, or 50 thousand shares, hundreds of shares, in order to continue to support this price level, and continue to raise the price of the stock.