Trading Strategy - Knowing What The Big Boys Are Doing Should Be A Major Part Of Your Trading System

A lot of beginning investors and veteran traders alike believe that any stock that has more than 30% of their shares owned by institutional traders is an enviable situation. If the big boys like it then it must be a good stock. On the surface who can argue with that logic. Everybody knows that the big money would never invest in a stock that had not been thoroughly evaluated.

The problem with institutional ownership is not when the big boys love the stock; the problem is when they all of a sudden don't love it anymore. Institutional ownership can be a two edged sword, knowing how to wield this two edge sword should be an important element in any ones trading strategy.

On one side, when the big boys love a stock, they can support it through the rough times. They can offer a certain amount of liquidity when the individual investor wants to liquidate. And quite frankly, everyone loves to own the stocks the big boys do.

However, on the other side, what happens when the big boys no longer like a particular stock? What happens if a lot of institutional money decides to close a position or take profits? If 30 or more percent of the shareholders decide the investment isn't "working out" and they decide to liquidate their position the price of the stock will ultimately decline.

Another problem with strong institutional ownership occurs during a strong market rally. When the market is strong and institutions own 60 percent or more of the underlying shares, the stock might not move much during the market rally, simply because the institutions trading strategy focuses on a more "buy and hold" outlook.

Since the majority of the shares are "long term" positions there will be low "trading" activity because the volume of the shares being traded is hindered by the institutional holders. The problem now is when the institutions decide that their "long term" position is not participating in the market rally, because of this, they may decide to pull their investment dollars out of the stock, which isn't moving, and reposition themselves where the action is currently taking place. This sudden liquidation of a "non-performing" stock could be severe to our institutionally owned stock.

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