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Supply, Demand, and Stock Movement

By the end of the day, a stock's movement can be broken down based upon who is willing to own it and at what price.

Sometimes investors tend to overcomplicate things just a bit. They tend to forget that at the end of the day, financial markets are laid upon the simple foundation of supply and demand. Yes, it is true that macro-economics affect a company's business growth and therefore impact the revenue and ultimately earnings, but at the end of the day, a stock's movement can be broken down based upon who is willing to own it and at what price.

This foundational truth is one of the reasons I find basic technical analysis so helpful. A glance at a chart tells us which side is currently in favor, the supply side, or the demand side. Whether technical analysis works because people follow it, or people follow technical analysis because it works, doesn't make a difference to me. What I do know however is that people identify with certain price points, and as a stock moves closer to that price point, they are inclined to react as they have in the past.

Take for example, General Electric (GE), which has been moving between $32.00 and $38.00 for the last 3 years. The stock has been moving sideways for a prolonged period allowing an investor the opportunity to clearly see at what price point supply was in favor and conversely when demand was in favor. Investors, routinely stepped in when the stock crept towards $32.00 creating the appearance that the Dow heavyweight was a bargain at that level, however once the stock advanced back to the $37-$38 level, those shares were sold, making one believe that at this point, demand was gone and sellers were willing to part with their shares. This pattern played out for 3 years, so one now has to ask the question, what changed? Why did a price point that mattered for so long, become obsolete earlier this year as the stock advanced over $40.00, before settling back to $39.00. Is there new demand? Is there less supply?

Or how about a stock like Intel (INTC) that for the last several years hasn't possessed enough demand to even move sideways, rather the stock has seen a series of lower highs and lower lows, displaying that along the way the demand continued to wane and those with supply continued to lower their expectations. However only lately has the stock notched a series of higher highs and higher lows, allowing the observer to infer that something has changed. No longer are those with shares willing to part with the stock at a depressed price point, and no longer are those desiring to enter the stock waiting for new lows to be seen.

To see the opposite effect, take a stock like Goldman Sachs (GS) where for the last four years, demand has outpaced supply in such a way that each new low was higher than the last, and the trend clearly favored demand over supply until only recently when something changed. The stock broke the predictable pattern it had seen for so long and returned to a level not seen in over 12 months. Of course this could be the point at which the stock is within an area where demand once again picks up and supply is no longer the heavyweight, however only time will tell and the fact remains that something has changed.

So many are starting to discuss a rotation whereby money is flowing from certain areas to other areas, and this may be evident by simply reviewing some charts. So often we overcomplicate the matter, rather than looking for the tracks of those who have very big feet.

Many investors would be wise to always stick with those stocks where it is clear demand is outpacing supply as trends will often last for a series of years, not months or weeks. They will however be choppy and there is no rush to enter them, however once they are established they more often than not become rather predictable.

Take the opportunity to glance at the charts of the names you are in. Be honest with yourself and ask the question; which side is in control of this stock? Once you can answer that, you will have created your action plan and will know what to do.
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Positions in GE, INTC

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