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Why is TBSI crashing?

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November 22, 2007 – Comments (1)

Someone else asked this in their blog recently and I tried to answer the question in the comments.  I'm reposting my answer here, maybe someone will have more to add.

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Well let me take a shot at this question.

First let's realize that a stock has selling pressure and buying pressure.  If the sellers greatly outnumber the buyers in terms of shares on sale, the price has to drop for the sellers to complete their transaction.  The reverse is true - if the buyers outnumber the sellers at a certain price point, the transaction price goes up.

Have you ever looked at SEC form 4s - insider buys and sells?  If so, you've probably heard the conventional wisdom that insider buying is a good bullish sign, but insider selling doesn't mean much.  An insider may just want to diversify his investments; he may need money to make his tax bill or buy a vacation home; he may be getting ready to retire.  Who knows.  Selling is not always about the quality of the stock, in contrast to a buy.  No one buys a stock for any reason other than that they think the stock is going to do well.

This is true about other shareholders too.  Large institutions, pension funds, mutual funds and hedge funds own most of the stock out there.  Retail investors like you and me own little of it.  These institutions - say, a hedge fund whose investors are looking at the NAV on a daily basis - maybe they invested in financials too early and took a heavy loss.  They have to offset this with a profit to avoid a flood of redemptions from their angry, wealthy investors.  Or say a mutual fund faces a flurry of redemptions from nervous investors.  They have to sell stock to make the redemptions.  They have no choice.  (Index funds, incidentally, are an exception to the rule about buying always indicating a bullish sentiment.  If you buy a S+P 500 share, you're buying WaMu and CFC right along with XOM and SLB.)

Now consider the U.S. equity markets.  There's about $30 trillion of market cap.  If the market loses 10%, there's then about $27 trillion of market cap.  Where did all that money go?  The answer is that $3 trillion of capital left the equity markets for other investments.  Maybe the people who direct that capital put it in U.S. Treasuries, maybe they put it in foreign equity or foreign government debt or they have it sitting in Euros or Yen.  Who knows?

When you start to consider these capital flows, their origin and rationale, then you are starting to do technical analysis.  Most price moves on a stock have nothing to do with the underlying company's performance and all about what sector the stock is in and where capital flow is trending currently in the markets.  When you ask a question like "why is TBSI down 55% in the last couple of months with no change in the underlying business outlook" you are asking a technical analysis question and the answer will always involve institutional capital flows. 

1 Comments – Post Your Own

#1) On November 22, 2007 at 7:53 PM, abitare (29.59) wrote:

TBSI, CROX, DRYS, HLYS, NILE, DECK, GME = pump and dump

TBSI, DRYS, HLYS, CROX are on the second  phase of the formula

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