DO/DID YOU KNOW?
Institutions Force Crashes
In our Do or Did You Know? blogs we provide readers with useful information that generally is not realized by inexperienced investors. In Chapter 1 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we briefly introduce the concept of Market Manipulation.
If you have any experience as an investor, you have probably been told, or have seen, that the equities markets tend to go up over time. Simple…if you are invested long-term in a company sponsored 401k plan, a pension fund, or dividend paying equities, there is usually a process that is followed for incremental investing, that avoids trying to “time” the market. Younger investors tend to ignore the everyday gyrations of the markets, and essentially leave their future in the hands of fund managers. Astute long-term investors usually take advantage of market downturns to buy strong stocks cheaper.
Short-term investors and traders, however, face a much different dilemma regarding the status of their portfolios. Since they depend on much shorter-term price action, the ebbs and flows of equities are much more important to their success. As a result, they are more susceptible to the wild gyrations in highly volatile times. This is where the “market-makers,” mainly financial institutions, play a major role.
Institutions, also known as “smart-money,” are the entities who control the price movement on the major indices, as they possess the ability to “move” prices with the sheer volume of shares they can buy and sell. Unfortunately, their power to “control” equities through large blocks of trades, pre-set algorithms, and news announcements, puts the retail investor at a disadvantage. They trade globally, 24-hours per day, and on auto-pilot, at times only searching for a few cents change in the price of a stock.
More importantly, they control investor sentiment, and can easily change market sentiment at a moments notice. Have you ever wondered how you never seem to hear any news, analyst ratings change, or earnings announcement before the price has moved significantly? The institutions have the capability to obtain information before the public, and are experts in the timing of news releases. They are also able to “see” all bid and ask orders on the public “ticker tape” and adjust their spread to take advantage. Additionally, they have the ability to “see” all stop orders placed in the system, and will move the stock to that exact price to obtain your shares, which is why we suggest to always keep stops mentally (or on paper).
These price movements can be accomplished in milliseconds with the advent of algorithms and trading bots, which are pre-programmed to transact at certain strategical price points, often causing price reversals. It is also quite obvious that these institutions are working together (not accusing anyone specifically of collusion), or at the very least are trained to use the same technical analysis, as it would seem impossible for all the “market-makers” to have the same immediate human reaction over such a widespread number of stocks. It is physically impossible to manually place the vast number of orders to change the direction of so many stocks at once.
Therefore, it is not a stretch to believe that these institutions have pre-set levels/price pivots that they have calculated when they will bulk buy or sell. Whether you believe in Fibonacci retracements, Volume profile, simple moving averages, or any other technical strategy, they all seem to work in tandem, especially when driving price down. The simple reason for this is to sell high and buy low, while most retail traders tend to do the opposite, due to FOMO (Fear of Missing Out) or FUD (Fear, Uncertainty, and Doubt), also explained in our publication. Although news, upgrades and downgrades, and earnings announcements will cause short-term reactions, it is generally the work of the institutions when large pullbacks, corrections, and crashes occur, as they are setting up their ability to “buy low.”
Be conscious of these tactics, and do not panic if you are a longer-term investor. If you are more of a speculator, watch for the obvious signs of reversal, keep to your system, including mental stops, and do not fall prey to their play on your emotions. Trading the extreme situations we often discuss (like the Fear & Greed Index for one) is likely the better strategy for the trading and investing novices.
*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
