Volume

aaronguse

I am hoping someone could help explain what happened in this chart:

I am looking at STM on Fri June 09. During the day STM price dropped 0.80 with high volume. But with a closer look on the 10-min chart and lower charts we see a large positive spike in volume with minimal price movement. From what I understand large volume tends to move price. But when we had a large positive volume price dropped.

Can someone explain why?

markd

Prices change when there are not enough shares offered to meet demand at that price (so prices rise to find more shares for sale) or, there are not enough dollars to buy all the shares offered at that price (so the price is lowered to find more dollars).

If prices don't move, or don't move much, it means there were enough buyers (dollars) to take in the supply (shares), or enough shares to soak up the dollars available.

So, this was probably a few institutions or funds trading with each other, one to dump a chunk of their total stake, the other to add to theirs. If you look at the one minute chart you can see the trading was spread over three minutes. Another possibility is dueling algorithmic traders whose software went crazy for a few minutes.

aaronguse

Since you mentioned institutional investors...
Other than institutional investors believing a stock will go up or down, what is the importance of multiple institutional investors and multiple mutual funds holding a stake in a company?

markd

Well, Richard Wyckoff had a lot to say about this back in the 1930s. If you are not familiar with his work, you should get to know something about it. A couple of books that explain it pretty will are

Charting the Stock Market - the Wyckoff Method ed. Jack K. Hutson
Three Skills of Top Trading by Hank Pruden.

You may also be able to find a free pdf of his original stock market course, which seems to be in the public domain.

"The Richard D. Wyckoff Method of Trading in Stocks"

You could also review the Wyckoff blog on Stockcharts.

The underlying idea is that institutions need to acquire large stakes but they cannot acquire their entire position all at once because that would raise the price too quickly. So they have to acquire it in pieces at low prices without drawing attention to themselves. This usually shows up as a range of several weeks or sometimes months after a climactic sell off and a small rally (but note that a climactic selloff is not always the final low - it can take a while). The range forms because buyers want to protect the lows, so their new position doesn't go underwater, but they also want to cap the highs so they don't have to pay too much to acquire their position. They also want to discourage others from getting a position because they might sell out before the stock reaches the intended target price.

The same thing is true when institutions wants to sell a position they believe is fully valued. They cannot sell it all at once because that would crash the price. So, either they sell on the way up, or they create a range after a blow off top and sell to bargain hunters who think there is more upside.

Of course not all institutions are savvy. There is a herd mentality even among the big money. The problem is, when they all act at once, the market becomes one-sided and price either races up or races down looking for the other side. Usually, but not always, larger market cap stocks are more broadly owned by longer term investors, especially if they pay a safe dividend, so less volatile. Mid to smaller cap stocks are usually, but not always, more vulnerable to big sell offs or buy ups.

aaronguse

markd,

Thank you for your feed back. It is greatly appreciated. You have always been a great source of information in these forums.