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  • Demand Trumps All as Market Indicator

    By Rev Shark
    RealMoney.com Contributor
    2/23/2006 9:01 AM EST

    Advice is the only commodity on the market where the supply always exceeds the demand."

    -- Unknown

    Market players consider all sorts of things when trying to determine where the market is headed -- everything from international politics, macroeconomics, the Fed, charts and even astrology. The arguments predicting which way the market is headed are infinite, but in the end it always boils down to one simple fundamental economic formula: supply and demand. If money flows into the stock market while the supply of stocks remains steady, then prices go up.

     
    It is pretty darn simple when you think about it but market pundits and commentators spend endless amounts of time and words trying to predict whether investors are inclined to put more money in the market or take it out. It is interesting to consider complex topics like yield curves and productivity gains, but they are really only important in how they ultimately affect demand for stocks.

    Simply supply and demand is the best explanation for why we see the seeing the DJIA and S&P 500 hit multiyear highs: Individual investors are buying stocks. The WSJ reports in an article this morning that brokers are seeing near record trading volume and investment flows as money moves out of real estate. Charles Schwab states it is seeing the highest cash inflows since February 2000. Fidelity mutual funds saw cash inflows during January of $5.6 billion vs. $400 million in the prior year.

    Of course, individual investors are not the only source of demand. Asset allocation by big pension plans can dwarf individual investor demand but ultimately individuals drive the actions of most major funds and institutions.

    In formulating a thesis about where this market is headed, we have to keep in mind this fundamental issue of individual demand for stocks. If the average investor decides that stocks are the preferred vehicle and starts shifting cash that way, it doesn't much matter what other arguments for or against the market there may be. Demand will reign supreme and all the most logical and compelling bearish arguments in the world are meaningless if people simple decide they like the idea of putting more money in to the market.

    We have a little softness to start the day. Overseas markets are mixed and commodities are mostly lower. There are a few ugly earnings reports on the wires but the weekly unemployment claims data continue to trend down slightly.

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