As the Fiscal Cliff discussions wrapped up at the end of last year, the market jolted higher. Now here we are at the end of January pushing new highs above 1500. That begs the question: Is now the time to take profits?
One of the best places to find clues is by following the big institutional investors (aka "The Smart Money"). They often prove to be leading indicators of where the market is heading next. I watch their institutional filings every day and have insight into where the Smart Money is moving.
Any change to a holding of 5% of the outstanding stock must be followed within ten days of the event in a 13G/D filing with the SEC. Those filings tell investors if the large institutions are taking profits on their big holdings. These filings are the basis of my insight.
Broad Buying Followed by "Selected" Selling
Early in the year, there was broad buying. The filings were coming in from the biggest players like Fidelity Management Research (FMR) and BlackRock at a steady clip. There were also plenty of smaller players filing in the first several days of the New Year. Stocks in all sectors were being bought with both new positions and old holdings being added to. This broad scale buying helped push the market higher.
Recently, however, there have been a lot more filings that show institutions reducing positions in some big holdings. The selling is not coming just from the biggest asset managers; it is a wide spread selling come from names like Wellington, BMO Financial and T. Rowe Price. So what stocks are being sold?
The Lag and Two Examples
When institutions sell stock in their big holdings, there is a mandatory filing. They can file on the day of the trade or wait as many as ten business days. As an example, Wells Fargo sold nearly all of its holdings in McMoran Exploration (NYSE:MMR) on 12/31/12, but waited to file on 1/11/13. FMR, however, decided to file on 1/10/13 of a sale of Navigant Consulting (NYSE:NCI) the very same day.
The reasons for withholding or filing can vary. In the case of MMR being sold, the sale was likely a tax-related move in a name that is involved in M&A. Selling at the end of the year allowed the asset manager to book a gain and avoid the higher capital gains taxes that were instituted in 2013. Upon selling the stock, management may not be as willing to talk to the portfolio managers at that institution, thus giving more reason for a delayed filing.
The FMR sale of NCI was a good deal smaller, and a release of all of the stock that was held. Filing on the same day is a signal they have decided to move on and do so immediately. Since the sale, NIC dipped a little but has since regained most of what it lost.
What is Next from Institutions?
More recently, the selling has slowed down, and from experience I know that the end of the month is much busier than the middle of the month. This could be a form of window dressing as some funds close their books on "off calendar" months like November or January. This alleviates pressure that can come at the end of the typical fiscal periods.
So will it be window dressing buying, initiation of many new positions, or selling? We won't know until at least the 11th of February, but we might be able to get some hints before that. Some filings may trickle in early, and some positions may be quickly altered and in need of a new filing. The direction of the broader market will also give us a general indication if institutions are selling or buying. Big block trades are often the fingerprints that institutions leave behind for savvy investors to pick up on.
How Can We Profit Either Way?
Simply put, knowledge is power. Knowing that the filings are coming is not good enough. Any Wall Street professional worth their salt knows that these filings come fast and furious and are available at the SEC website. Better yet, go to the investor relations website of the companies in which you hold stock and make sure you are on the email list for all SEC filings.
After following an institution into a stock, we watch it like a hawk. We look for clues from investment bank research and basic trading activity. Institutions tend to trade in large blocks, and being mindful of that we are able to see if there is more block selling in names we hold through constant monitoring. When we see those big blocks, we know that can spook the other holders and we can exit a position before the big institutions can sell all their shares.
When it comes to generating long ideas to profit from, the filings can also be very useful. By following the premier institutions you can invest right alongside them on the plays that make the most sense. Often times, asset managers keep their friends close and their enemies even closer, so they know what the competition is doing. This insight can result in a follow investment from another institution, a move that can drive a stock up in a material way.