Saturday, July 01, 2006

When Institutions Are Strong Buyers

As noted in recent posts here, the Trading Psychology Weblog tracks Institutional Buying and Institutional Selling as separate variables. Often, as before the Fed announcement, markets will move up not because of high buying, but because of the absence of normal selling activity. Other times, as on the Thursday of the Fed announcement, we see the market move up on *both* above average buying *and* below average selling. This reveals a true demand among institutions.

Going back to July, 2003 (N = 742 trading days), I found 25 days in which Institutional Buying was very strong (over +400) and Institutional Selling was very light (over +400). Interestingly, there was no edge for the next day of trading, as the average price change for SPY was a loss of -.09% (12 up, 13 down). This is weaker than the average one-day change of .03% (404 up, 338 down) for the sample overall.

By four days out, however, the strong Institutional Buying days averaged a gain of .20% (15 up, 10 down). This is modestly stronger than the average gain of .13% (409 up, 333 down) for the sample as a whole.

This is a common pattern I've found after market gains: very near term consolidation followed by renewed short-term strength. We saw a bit of that consolidation on Friday and, post holiday, will have an opportunity to see if this rise lives up to the historical pattern.