News noise

If you turn on any financial TV show, you find people reporting news about stocks in almost the same way they would a sporting event. As you become more accustomed to working with charts, you’ll find most of the news to be just noise, with maybe a few bits of information you can use as further research with your charting.

A great example of news noise is gross domestic product (GDP). Gross domestic product is how much economic activity is happening in the economy. You continually hear that an economy is growing fast or slow. However, the stock market doesn’t speed up or slow down based on this news. When the economy and the stock market are compared side by side, it is clear that one does not predict or follow the other. In the United States, the GDP has ranged from positive 5 percent growth (which is huge) in some quarters, to negative growth in other quarters. The stock market does not reflect this huge variance.

If a country’s GDP were soaring at 4 percent over two quarters, you would think the stock market would be too. If a country is sporting 4 percent GDP but the stock market has been going lower for the same six months, the GDP is not a timely clue for investors to use for investing. Over long periods of time, if the country’s economic output is improving, the stock market is probably improving.

Changes inside a company

Stocks are also hit by other forces that you as the owner of shares in an individual company may be unaware of. Changes in government policy toward the company, internal problems in the company, or changes in sales of finished products for the company can have a positive or negative effect on the stock, long before any announcement.

For example, suppliers have insider knowledge about how things are going at the companies they supply. They can quickly determine whether a company is increasing or decreasing its order size. They may notice the first signs of a company in trouble, because the bills are being paid more slowly or the company is cutting down on standing orders.

The employees within the company may also have a better feel for what is happening inside a company or industry. While it is illegal to trade your own company stock or tell other people to trade with insider knowledge, there is no law against buying your competitors’ stock just before a quarterly or annual report on earnings if you see the industry improving. These outside forces can be a long way from your scope of knowledge. The larger the company, the harder it is to know about all the pieces.

Reading reports by analysts may give you some hint of what they are expecting to see in the upcoming quarterly or annual company reporting. You can never know for sure what is going to happen until it is formally announced by a company, but the financial press certainly may alert you to the possibility of a major news story regarding a particular company or its stock.

Institutional investors

Institutional investors are large investors that buy millions of dollars of shares in individual stocks. They may be fund managers like Fidelity, hedge funds, large family trusts, or huge brokers with big clients.

With millions of dollars at stake, some investment companies go to extreme lengths to keep track of activity. Here are a few examples:

• They interview every management member they can for clues. One concern about this is that the company leadership isn’t going to tell you to sell the shares. They will always find something on which to put a positive spin.
• Some large investors use satellites to track vehicle traffic at box stores like Lowes and Home Depot. If they think the volume is improving in various parts of the country, they’ve obtained powerful knowledge that the average retail investor doesn’t have.
• For holiday shopping seasons, institutional investors buy traffic-flow monitoring data from survey companies that place employees in malls to count customer traffic. They compare that store-level knowledge with the car volume from the satellite monitoring companies. Then they try to figure out who is getting the sales and who is not.

While a company stock may still jump up or down on an earnings announcement, lots of serious investors are willing to make sure they have a good idea as to whether the company is going to have a good number.

For an investor without helicopters, satellites, money, interview suppliers, and management teams to disperse, these tactics can all sound a little overwhelming, but don’t let them scare you. You can level the playing field by being nimble and using different sources of data, as you find out in the next section.

Tracking institutional investors

If large institutional investors are buying up the stock, that’s probably a good clue. Conversely, if they are selling the stock, that is still a clue, just not a positive one. They’re not really interested in telling everyone else what they are doing, but they do have to release their current holdings in a stock, and this information can be timely.

For a stock to move up in price, it needs the large institutional investors to start investing in the stock. If enough large institutional investors are trying to buy up the stock, this action pushes the price higher. As the price goes higher, most investors are happy to keep owning the stock because they are making money. Conversely, when large institutions want to sell their position and there aren’t enough buyers, this pushes the stock down.

The key for tracking moves by institutional investors is trading volume. In Chapter 3, we talk about how to display volume on charts. When these investors are making a big move in a stock, whether buying or selling, the volume of trades goes up. If they are selling, you will likely see a downward trend in stock price. If they are buying, you will likely see an upward trend in stock price. You find discussions about volume throughout this book.

Studying pressures on stock prices

When a stock sale takes place, a buyer is buying the shares from a seller. When more investors are trying to buy shares than sell shares over a short period, this pushes the price up. You may hear that there can’t be more buyers than sellers — that the numbers are equal. But the number of people with the desire to buy can be higher than the number of people with the desire to sell. The way that comes into balance is through the buyer raising his bid to buy the shares. The imbalance is where you see the price forced to trade higher, so the seller is motivated to let the shares be sold to a buyer who is willing to pay more.

Understanding that stocks trading higher in price are probably moving higher because there are more buyers than sellers is an important piece of knowledge. You have a way to see that actually happening. Using a stock chart can give you this information.

While you can’t keep track of a stock price in your head for every stock in the market, you can use the history of the stock price, and this information can be shown on a stock chart. A stock price moving up is the sum of all known information about the stock at any given time by investors. Some may have more information or less information, but the price of the stock reflects a balance between buyers’ and sellers’ opinions. Throughout this book, we show you how to take advantage of the history you can see in charts to help you make better buying and selling decisions.