Following the Money Trail

By George Leong, CFP, MBA — The Leong Side of the Market column

Markets closed higher for the third time in four sessions to begin March. The major stock indices continue to hold above the technical support levels, but trading remains on the cautious side, as markets are at a crux. The overall market is neutral, with 79.72% of U.S. stocks above the 200-day moving average (MA) as of March 1, versus 79.03% a week earlier and 76.43% a month ago.
A metric I like to look at is the monitoring of what the professional traders and money managers are doing. Some call this “following the money,” as the belief is that they know the story about a company more than the layperson. This is generally true, but is not always the case. Yet, by looking at the institutional holdings of companies and watching what they are buying, you can get some sense of what stocks may be in favor. It is just another analysis tool you can use to analyze what to buy.Institutions control vast sums of capital and can sway the direction of a stock if they buy or sell. These institutions are also extremely accountable to their investors; hence, there is a high level of quality research and due diligence before taking a position; much more than
with the retail investor. So, if you adhere to this belief, then following the money trail would make a whole lot of sense.Take a look at Apple Inc. (NASDAQ/AAPL), for instance. The company is hot and tearing up the price charts with a sustainable rally to new historical highs. Apple reported that it sold over 300,000 of its new “iPads” on April 3. The company is hot now and is also tearing it up in the PDA market, as it takes market share from Research In Motion (NASDAQ/RIMM). The who’s who of the financial world own Apple, including FMR, State Street, Vanguard, BlackRock, and Janus Capital. Take a look at the institutional holdings, which increased by 1.3% or nearly nine million shares quarter to quarter. This indicates decent buying in Apple, which could point to additional gains.The concern with Apple will be if the buying pattern reverses and we see a decline in buying, instead seeing institutional selling. This would be a sign to perhaps take some profits. Case in point: online book and music retailer Amazon.com, Inc. (NASDAQ/AMZN)
doubled up from its 52-week low, but is currently attracting some selling.  Institutional holdings fell by 10.2% or about 27 million shares quarter to quarter. The pros are taking some profits, which could foreshadow additional weakness ahead.

Google Inc. (NASDAQ/GOOG) is currently stuck in a range given its issues with censorship in the world’s largest Internet market in China. The pros appear to be somewhat mixed on this stock, as demonstrated by the cautious trading and the selling of 3.4 million
shares or 1.3% quarter to quarter.

The bottom line is that, as an investor, you need to monitor what the pros are doing as a complement to your own analysis.