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Institutional Investors: The force behind the movement of a stock

ITIPress.org - Soraya Nasrallah

In these troublesome times in the market it is imperative to make a distinction between a stock with the Institutional sponsorship* or without the Institutional sponsorship. Yes, the Market Direction is critical since 3 out of 4 stocks tend to follow the market, so we are thankful to have found a small handful of stocks that over the past year offered substantial returns.

Here are two samples of stocks that did quite well in the year 2002 after breaking out of a base on large volume. Immucor Inc. (Nasdaq-BLUD) from January 2002 at $7.98 (split adjusted), and by January 2003 it reached $25.91, a 224% increase. Neoware Systems Inc. (Nasdaq-NWRE) from July 2002 at $11.34 and by the end of August it reached $19.50, a 72% increase. It retested prior resistance (new support) near $11 in October and the rallied to $22 by the end of November.

What really is institutional sponsorship? It is when the shares of a company ’s stock are owned by institutions like Mutual Funds, Pension Funds, Insurance Companies, Hedge Funds, Bank Trust Departments, and State, Charitable and Educational Institutions.

The book “How To Make Money In Stocks” by William J. O’Neill says that it is important to know how many institutions hold positions in a company’s stock and if the number of institutions purchasing the stock now and in recent quarters is increasing. Keep in mind that the quality and good performance record of the institutional portfolio managers who are buying a company’s stock is also very important. Usually, large funds that take new positions will usually add to that same position, they often provide support by buying more shares when the stock’s price dips near its 50-day moving average or a prior support level. Thus, they are the critical factor behind a normal, steady increase in many companies’ share prices.

So how does one find stocks with increasing quality institutional sponsorship? IBD rates stocks that have quality institutional sponsors from A (best) to E (worst). Selecting stocks with Sponsorship Ratings of "A" will increase your chances of landing a stock that is poised to increase in price substantially due to the buying power of Institutional Investors.

To put it in simple terms think about a stock being like a pool full of water, with the water level being the price of the stock. Big Elephants represent Institutional Investors with lots of money. If Elephants start jumping into the pool (or buying the stock) the water level (the price of that stock) will go up very quickly! But if the Elephants start getting out of that pool (or selling the stock), then the water level (price of the stock) will go down very quickly. Look at what happened to a lot of the tech stocks in 2000 and 2001. When you study the charts of these companies you will notice that the large declines in price were accompanied by an immense amount of volume, which led to the harsh breaking of upward trend lines and key moving averages. Companies like Cisco, America Online, Yahoo and others had an excessive amount of Institutional Sponsorship (over owned) and that made them easy targets for a collapse. Investors saw their fortunes dwindle when they did not sell while the big Institutions were selling. The Big Elephants were tired of hanging out in those pools and decided to jump out (fund managers were moving into cash or looking for other pools.)

The main reason why investors lost money is because they did not focus on the volume while their stock’s price was declining, gapping down, and breaking important points on their charts. They didn’t recognize or understand the importance of the distributional action (selling) by the large Institutions.

While searching for stocks to purchase for your portfolio it is important to understand that without the buying power of quality Institutional Investors a stock is not likely to significantly appreciate in price and be fruitful for you.

* “I” - Institutional sponsorship (CANSLIM Formula)

Send questions to Soraya@TheInvestor.tv  or Info@TheInvestor.tv

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