Your preferences for upside stocks are the leading stocks at or near 52 week high. Concerning "big money," do they also buy in at or near 52 week highs or are they more in tune to get stocks at lower prices (buy low sell high). Or, are there different schools of thought. Can you explain a little concerning how big money works. (May 27, 2003)

  With respect to institutional buyers, there are value buyers, there are breakout buyers, and there are combinations of the two. We like the breakouts on strong volume because they tend to show that more than just a few institutions want that stock. For example, during a base there may be a few institutions trying to quietly buy a stock. Perhaps they like the growing earnings and sales or maybe it is some other reason. They continue to buy even as the stock starts to move higher as demand is a bit stronger. More come into the picture, and then when it breaks out perhaps there was an earnings report or some other reason other big money wants a piece of the action. When volume jumps on a strong breakout, that confirms the accumulation of those institutions buying during the base. They were onto something and then the rest of the market wanted it.

So why not buy when a stock is lower, say right at what appears to be the bottom? For one, you don't know if it is the bottom; it is still bumping along under quiet accumulation (maybe). It could go lower. You don't have a clear picture of what the accumulation is. As we saw in the downtrend, buying what you thought was low often was high (remember the strong buys as stocks fell lower and lower in the selloff). We will buy a stock as it comes off of the lows if it shows good accumulation already, has a decent pattern, and is clearing some resistance. We saw that a few times with the chips as they would form up what we called 'building patterns' where they are working on a better pattern but were ready to break higher near term while doing so (a lot of that in October and November). There is no guarantee they will run higher and higher, but those patterns can give nice trades and we will make them and let the run as long as we can.

Another factor is time. How long will a stock bump along before it makes a move? Bases can be a matter of weeks to months to years. Most of the action happens in a short period of time. We like to see the move set up and step in, thus getting maximum impact for our time and money. We can utilize the money on different plays in the interim as opposed to sitting and waiting on a stock to move. Moreover, in an expanding market, the stocks that are in the lead are the ones that make the bigger gains. If there is a strong expansion, the stocks that break higher early on tend to lead and tend to return the bigger gains. Thus while you can buy lower and perhaps pick the right stocks and post a nice gain up to the breakout (and we do have those on the report that we picked up because they were showing early signs of leadership with those 'building patterns'), often the big gains come after the breakout when the rest of the big money moves in to buy the stock. Then what appeared to be a buy at a higher price was actually buying at a point where the stock's strength was proved and you end up buying moderately high and selling a lot higher.

This works best in an expanding market. There are always pockets of strength even in a downtrend (defensive sectors are bought), but in a continuing downtrend many stocks break higher just to fail.


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