Explanation of Friday's end of quarter lunacy.
First take a look at the 5-minute chart of the following stocks to a get a true appreciation what transpired.
THDO
siliconinvestor.com
DLIA
siliconinvestor.com
WMUX
siliconinvestor.com
Btw, in my next post I will comprise a list of the many stocks that were pumped and dumped at EOD on friday.
For the record:
DLIA and WMUX were on the Russell additions list and THDO was not on any list.
Lets try to understand what happened:
Lets say we take a fund manager with a 200 million under management.
At the end of each quarter, he is compensated according to his performance (lets use 3% of profits as his bonus as a ballpark round figure)
Lets say he owns 50 stocks and 500K shares each.
Quarter has been ok for him, nothing special, he is about even or maybe slightly plus.
He wants to receive a nice bonus, what does he do?
He picks out 5 stocks (smaller priced stocks in his portfolio that dont have tremendous volume every day)
He decides to add to his existing 500K holding last 30 minutes of trading 50K shares in each of the 5 stocks.
Btw, he is not the only fund manager doing this in these same stocks (numerous others as well)
So, the last 30 minutes of trading he is buying a bunch of new shares, as well as other managers and driving the price up.
Lets say they take an average stock with a price of 6.00 and drive it to 7.50 by the close.
Now these stocks are worth 1.50 more.
He had 500K shares in each stock originally.
For a minimal additional 10% investment, he increased the value of his portfolio by 3,750,000 (500K times 1.50 times 5 stocks)
This means now he picks up an additional 3% bonus on 3,750,000 or $112,500.
Not bad work if you can get it!!!!!!!!
Now you add in the russell additions, NAZ having major problems, 1 hour of extended trading, only buyers in the market, most cant short or sell in AH and most are not even aware what is happening.
This leads to total chaos and instead of 1.50 pump, many stocks are pumped significantly more.
Therefore increasing the bonuses even further.
Now what happens monday:
Friday there were only buyers, monday those buyers are no longer there.
Instead, over the weekend every joe investor that was working on friday, realizes how much his stocks have appreciated.
He cant wait to sell come monday morning.
These stocks gap down due to this selling and the selling continues for several days until these stocks retrace most of their gains.
Dont forget there are no buyers now, why would anyone buy at these premium prices.
Nobody cares about supporting these stocks anymore.
This scenario happens at the end of every quarter in 20-50 stocks depending on the quarter. (dec quarter is usually a much smaller effect)
Btw, there is also the reverse occurring, but on a much smaller scale, as certain stocks are sold out of portfolios.
Therefore driving the price down.
(These are very small in number compared to the buy side stocks)
traderpulse.com
Michail |
