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August 16 2022 10:22 PM ˚
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Bought the dip? Whoever is on the other side makes a big difference in the outcome

Last week, Apple reported its quarterly earnings and beat expectations right out of the park with the biggest spring quarter profits in 45 years. (Photo: Unsplash)
Last week, Apple reported its quarterly earnings and beat expectations right out of the park with the biggest spring quarter profits in 45 years. (Photo: Unsplash)
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Last week, Apple reported its quarterly earnings and beat expectations right out of the park with the biggest spring quarter profits in 45 years. Microsoft did the same! A day later however, both stocks were about 2 percent down each. Both companies boost a combined market value of over $2 trillion, making them bigger than the economies of most countries! So, what is the deal? اضافة اعلان

To draw a theory for this unjustified volatile price movement, we need to first understand the current dominant players in the stock markets today, and to do that we need to understand how the current US government balance sheet expansion process is set up.

First and foremost, as part of the effort to combat the potential damage to the economy caused by the pandemic, the US Federal Reserve began heavily injecting money in the system in the form of cheap loans available for banks and large financial institutions and the purchase of financial securities such as bonds.

Unlike other businesses, banks cannot keep cash sitting around for too long because most of it is not theirs, meaning they have to service the cash. In some cases, they have to pay interest on it and in others, they have to pay capital gains for investors who invested in said bank. This dilemma in the nature of a bank’s business model forces banks into the markets and creates a need for them to continually find investment deals they can enter and exit profitably to cover the costs of maintaining and handling people’s money.

Banks are naturally forced into maintaining a diversified portfolio of investments in a variety of financial assets such as stocks, bonds, ETFs and others — a process that is difficult on its own. However, given the volumes of money they transact with, banks cannot efficiently afford trading in environments of rapid and continued market spikes/rallies (i.e. prices climbing sharply) due to what is known as liquidity tranches, or as technical analysts call it, volume profile.

If you think about it, banks don’t really invest the way we do; they buy and sell much larger quantities of a stock or any other asset. In essence, this simply means that as prices continue to rise, more will be incentivized by confidence or greed to hold on to their investments rather than sell, so as the price goes higher the volumes available to transact go down, and big banks that bought the dip might not necessarily be able to hold on to their investment the long way, being forced to sell at high liquidity zones above their entry price, or risk getting stuck with not finding enough buyers at the top.

As banks exit their deals — or more than often get forced to exit — more and more retail investors are respectively left in the market. This tilts the scale of dominance and one can only start to notice unreasonable behavior in the market.

You see, retail traders are far less scientific in their approach and much more reckless than big financial institutions, with their interest laying in riskier instruments such as meme stocks, penny stocks, cryptoassets, etc.

It is due to this factor that we will continue to see less and less reasonability in price action, as appetite is more steered towards risky instruments than real good businesses. Retail investors are also much more impulsive in nature and usually seek out much shorter-term trades, which usually causes the markets to whiteness more frequent flash crashes, as well as rapid price spikes.

The Volume Profile Indicator is a tool that I highly recommend you keep an eye out for to feel out who are the players participating in different price levels and know who is on the other side of your deal, be it selling or buying. This indicator alone is not enough of course, but it’s helpful to start with it, as you gradually acquire more tools to monitor and read the market.

Good luck navigating the markets!

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