Time to sell?

FR | June 23, 2005 | blueberry12

[blueberry12]

Following today's Supreme Court decision and a great selling day on Wall Street, it may be time to sell your stocks soon and go cash only for awhile. I think there is a high probability of an intermediate down trend occurring in the near future, a leg down in the general market. Here are the reasons why I think it's time to sell:

1. Last week Thursday near market close, investment funds or insiders traded a large chunk. They all moved at the same time. Here is a brief list of what happened on 06/18/2005 at market close:

MSFT	(Microsoft)	505 million dollars	(0.18%)
GE	(General Electric)	474 million dollars	(0.12%)
INTC	(Intel Corp)	300 million dollars	(0.17%)
C	(Citigroup)	285 million dollars	(0.12%)
WMT	(WalMart)	196 million dollars	(0.09%)
AIG	(American Intl Group)	177 million dollars	(0.12%)
AAPL	(Apple)	152 million dollars	(1.00%)

The percentages next to the dollar values tell you what percentage of the companies' shares changed hands in a single transaction. This kind of activity is a little bit rare.

These are just some of the stocks. Almost all stocks had similar transactions on Thursday. If these transactions were sellings, then that will definitely drive the market down.

2. The American government took another step toward communism today. This is definitely not good for the markets: The Supreme Court ruled that local governments may seize people's homes and businesses against their will for private development in a decision anxiously awaited in communities where economic growth conflicts with individual property rights.

3. "Low interest rates are a sign of a stagnant economy, and the low inflation rate simply reflects the inability of most businesses to pass along increased costs." -- Larry Burkett

I have not written this article because I sold the market. I haven't sold yet. DISCLAIMER: Everybody should make their own decisions when it comes to trading and investing. The only reason why I wrote this is because I thought I would share some of my findings with you. I may be totally wrong though, so make your own decisions!

[blueberry12]

Every book I read mentioned market makers as people with deep pockets. So, all I know is market makers do have large accounts. I do not know what is large or small, but I don't think they were referring to personal accounts. I think market makers are trading with their company's money. Am I wrong here?

[Protagoras]

There are books and nebulous amounts of money,,, and then there is reality.

I will tell you this, and you probably will never see it in a book,,,no market maker bought 22 million shares of anything priced like the QQQs. Market makers make markets, they don't bet three quarters of a billion dollars on the direction of the market.

And you will need to have an understanding of hedging techniques and uses of ETFs and the like before you can make any intelligent conclusions on the effect of transactions on the market place.

A little bit of knowledge can be a very dangerous thing when conclusions are drawn from it and actual money is invested as a result.

[blueberry12]

Market makers make markets, they don't bet three quarters of a billion dollars on the direction of the market.

No, you misunderstood me. What I was trying to say is the same thing. Market makers do not bet on the direction of the market. They just want to take the shares and redistribute them. Why? Because what is the probability that two people happen to trade 22 million shares? One of them wants to sell 22 million shares and the other wants to buy 22 million shares both of them entering an all-or-none order. What is the likelihood of that happening? 0% ?

Well, that's why there is a market maker. If the market maker sees that somebody wants to sell 22 million shares, the MM buys the block, because if he wouldn't be there, nobody else would be able to match that all-or-none order. So, he buys and then as soon as he bought it, he starst selling it. He sells 500 shares to you, 100 shares to XY, 400 shares to me, a 1000 shares to someone else... and so finally he is back to his back where he was in the beginning. He sold most of the 22 million shares. Other traders see that the market maker is selling, so they began selling too. As more and more support lines are broken and volume gets heavier, more people join the selling and finally we realize that a nice, strong downtrend started.

I will tell you this, and you probably will never see it in a book no market maker bought 22 million shares of anything priced like the QQQs.

OK. But then WHO in the world has the money and the willingness to buy 22 million shares when somebody else wants to sell that same amount? There are a lot of people who want to buy and sell 1000 shares everyday, so it's easy to match these orders, but there are not so many people who want to buy 22 million shares. So, I don't understand. If market makers cannot serve the big guys, then how do funds manage to sell millions of shares in a minute???

You know what would happen if I entered a limit order to sell 22 million shares? Whenever the price would get close to my limit price, the buy orders would get filled instantly, and traders would notice that there is some extremely large amount of supply at that price level, so they would become sellers. They would sell the market and it would go down, so my 22-million-share sell order would be left there and most of it would not sell.

What would happen if I used a market order to sell 22 million shares? As soon as I enter the trade, there would be a big drop in the market. That would be amazing. No sane person would want to do that.

So, how does it really work?

[Protagoras]

A firm on Wall Street matches buyers and sellers, upstairs, in direct negotiations with the clients.

Your imagination of how the trades you mention impact the market is not even close.

I do not have the time nor inclination to teach you block trading 101. Sorry.

Good luck in the market. Goodbye.

[blueberry12]

Can you explain me this chart? It happened a few years ago. I think whoever made this buy order was a genius:

I could show you a lot of other charts that look like this. There are a lot of geniuses out there. But that means there are a lot of stupid idiots too. If somebody bought down there, then that means somebody had to sell down there. How come that loser doesn't lose all his fortune? According to you, there are a lot of stupid millionaires who buy and sell at the worst time. You know, this was not the only occasion when somebody lost a fortune because he sold at the bottom. How come they don't learn??? And how come they don't lose all their money? How much money do these losers have? It seems to me that they have an endless supply of money, because they are making the worst mistakes that can be done, and they are consistently repeating the same mistakes year after year.