What Really Makes a Stock Move Higher or Lower?

Wouldn’t it be great if you knew whether a particular stock was going to do go up or down?

Unless you have some very reliable, market moving, information, you can only make an educated guess about which way a stock will move.  Your guess will have to take into account numerous factors that can make a stock move, including news, changing company fundamentals, macro economic and political developments, systemic market conditions, competition and a host of other things that could effect the stock price.

Market Movers

While all of these factors are important and warrant close analysis, they are all indirect causes of a stock moving. The direct cause of any stock move is massive buying that totally overwhelms the selling supply and forces the price to move higher. As long as the buying demand surpasses the selling supply, the stock price will continue to increase. When this situation reverses and sellers overwhelm buyers, the stock will begin to drop and continue dropping until the buyers return in force.

Who do you think is doing the brunt of that buying and selling?

It’s not retail traders like you and me. Retail traders make up a very small percentage of volume in the financial markets. The majority of the buying and selling volume is done by market makers, institutions, hedge funds, pension and mutual funds — otherwise known as the Smart Money.

The smart money is the only body that can move stocks and markets. They buy low and sell high.

How it Happens

In order for the smart money to buy in quantity, otherwise known as accumulation, they need to make sure that the stock price is cheap enough. To do that they will step aside to dry up demand and let the stock drop. They will also short the stock, using any kind of bad sounding news as a cover for the price drop. They might also plant some bad news or rumors, or release some negative commentary in the media, to get you to sell sell sell.

Nathan Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that, “the time to buy is when there’s blood in the streets.”

When investors are panic selling as if the end of the world has arrived is precisely the time that the smart money is buying, at fire sale prices.

This smart money buying will often appear on a stock chart in the form of a “Hammer Candlestick“.

This candlestick is usually accompanied my massive volume and indicates that buyers have stopped the downward movement and have overwhelmed the sellers and succeeded in moving the price higher from the low.

News or fundamentals did not drive the price down, causing you to panic sell. These factors provided the perfect opportunity for the smart money to drive the price down and shake you out, so that they could then buy.

The smart money buying might not cause the stock or market to reverse immediately. That’s because they want to buy as much stock as possible at cheap prices — so they will not push the price higher until they have the inventory they want.

They also will need to test the market to see if the sellers have fully been exhausted and there is no large supply of stock still waiting to be sold. To do this they will push the price up a little and see if there is selling pressure. This is known as a low volume retest.

Once the smart money has finished accumulating their stock, they will start moving the price higher, which will not be difficult since the there’s no one left to sell and stop the rise. This upward move will often coincide with a slew of good news that will make other traders feel comfortable to buy too.

As the stock continues to rise and the press and pundits continue to pump it, the retail community will enthusiastically jump on board and start buying aggressively, not wanting to miss out on the party. It’s usually at this point that the smart money will start selling (distribution), having made a hefty profit.

At the height of the euphoria, as retail continues to pile in out of pure FOMO, the smart money will complete their selling. Guess what happens next? Rinse and repeat.

Bottom Line

After all is said and done, stocks and markets are moved by smart money buying and selling. 

If you watch the markets closely you’ll be able to identify when they’re doing their work and join them, instead of being on the other side of their trade. You can do this my carefully wanting price action and volume, options flow, insider transactions and general market sentiment.

When things get too hyped, it’s time to start thinking about buying. When there’s “blood in the street”, it might be the right time to start buying.

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