Technology stocks have been the focus of the market selling so far in 2012, as the NASDAQ is down nearly eight percent since the end of March and is down 4.4% in November alone.
Technology and growth stocks are being sold by institutional investors, and you should make a note of this. Following where the professional money is flowing helps gives us another tool to evaluate the stock market and get a sense of what is happening. The reality is that the pros generally have better access to the company’s executives and management and may be privy to better information; albeit, they will surely never tell you this. Just try calling the chief executive of a company to talk about things. Your call will never be connected. Yet, if you were a top Wall Street analyst, your call would likely be connected.
So, having established that the pros have an information advantage, you have to find out what they are buying or selling.
The concept of following the money of institutional investors is the belief that these experts are likely to understand the company’s situation more than anyone outside of the executive management group. By looking at the flow of money from institutional investors and monitoring what stocks they are buying, you can get a much better sense of what stocks may be in favor at that time. This especially holds true for the top-ranked institutional investors and money managers, because, being the very best, they produce the top returns for clients.
The reality is that institutional investors control vast sums of capital and can sway the direction of a stock that they buy or sell. These institutional investors are also extremely accountable to their investors; hence, there is a high level of quality research and due diligence, which far exceeds the research of retail investors, before taking a position.
If you adhere to this belief, then following the flow of pro money would make a whole lot of sense.
Looking at some of the recent transactions, you can see some of the top-selling technology and growth stocks. Apple Inc. (NASDAQ/AAPL) was trading at $705.00 on September 21, but the stock has been on a steady decline to the $530.00 level. A closer look at the institutional investors’ ownership shows a 0.8% net sale of Apple stock over the last quarter-to-quarter, representing 4.8 million net shares sold by institutions, according to Thomson Financial. While there’s near-term pressure, Apple remains king in the growing tablet market. (Read “Attention Small Tablet Makers: Apple’s Coming for You.”)
We see a pattern in the net selling of other key technology stocks, including heavy selling of priceline.com Incorporated (NASDAQ/PCLN) with 3.7 million net shares sold, down 8.9% in institutional ownership. Other sellers include Netflix, Inc. (NASDAQ/NFLX), down 31.8% in institutional ownership, and Cisco Systems, Inc. (NASDAQ/CSCO), down nine percent.
In the retail sector, Wal-Mart Stores, Inc. (NYSE/WMT) is being sold, down 4.6% in institutional holdings.
In the restaurant sector, there is heavy selling in Chipotle Mexican Grill, Inc (NYSE/CMG), with a 4.4% decline in institutional ownership, and McDonalds Corporation (NYSE/MCD), down 4.5%.
The vast majority of DOW 30 stocks are seeing institutional investors selling.
We are seeing some big-time buying in consumer products manufacturer Johnson & Johnson (NYSE/JNJ), with 49.6 million net shares bought by institutional investors over the past quarter-to-quarter, up 2.7% in institutional investor ownership. There is some minor buying surfacing in Merck & Co., Inc. (NYSE/MRK).
The bottom line is that you need to monitor what institutional investors are doing to get a sense of what stocks could be moving and in what direction.