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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