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John is a lawyer and accountant with over three decades of corporate finance, due diligence, M&A advisory and related legal services for manufacturers, innovators and investors in the energy storage and renewable energy sectors. Over the last eight years John has earned a global following for... More
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  • Why Supply And Demand Inflections Are Different 16 comments
    Jan 7, 2012 11:47 AM | about stocks: AXPW

    For several months I've been writing about supply and demand inflection points like the one that started last week in Axion Power International (NASDAQ:AXPW). While many Seeking Alpha readers are familiar with the technical behavior of news driven price spikes, there are very few students of supply and demand inflections because they're rare. I'm intimately familiar with supply and demand market dynamics because my work over the years has included several reverse merger transactions and that's where supply and demand inflections occur most often.

    Since this is an important topic, I went to extreme lengths and bought historical trading data for Boots & Coots International Well Control, a reverse merger that I worked on in the summer of 1997 and know intimately. Boots & Coots was a textbook example of how supply and demand inflections develop. The nice thing about the Boots & Coots transaction is that it had four clear supply and demand inflections between August 1, 1997 and December 31, 1998. Here's the 19 month high, low, close price chart.

    The first supply and demand inflection began in mid-September when the market had absorbed two-thirds of the free trading shares held by former shareholders of the public shell. The inflection ended on November 1st when restricted shares held by former officers and directors of the shell became free trading. Here's the two month chart.

    The second supply and demand inflection began in January 1998 when the market had absorbed about two-thirds of the shares held by former officers and directors of the shell. It was a sharper spike that was quickly alleviated when the company eased resale restrictions on shares that had been issued to consultants and others in connection with the reverse merger. Here's the chart.

    The third supply and demand inflection started in April 1998 when the market had absorbed about two-thirds of the consulting shares and the price reached a level where the early open market buyers started taking profits. Here's the chart.

    The fourth supply and demand inflection started in August 1998 when shares held by pre-merger investors in the firefighting company became eligible for resale and the company reported disappointing Q-2 earnings. Here's the chart.

    The important takeaway from these charts is that supply and demand inflections take longer to develop than news driven price spikes and traditional technical analysis of resistance and support levels won't typically give you an accurate view of what's driving the price.

    Stocks: AXPW
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Comments (16)
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  • wtblanchard
    , contributor
    Comments (2411) | Send Message
    Are you suggesting there was no news related to any of these spikes?


    For AXPW, I hoping for the ole 1-2 punch ... good news and related publicity that then creates a surge due to the lack of supply.


    One might theorize that when there's a lack of supply and good news hits, "savvy" investors might take longer to build a position as they realize that piling in all at once will simply drive the price too high for prudent investing.


    They might ultimately acquire the size they want, but it will take them longer to do it prudently simply because there's not much supply available to do it at current (and presumably reasonable) prices.
    7 Jan 2012, 12:22 PM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » None of the spikes were news driven. They were simply market changes arising from changes in the relative balance between willing sellers an willing buyers. When there were plenty of shares available in the hands of willing sellers the price drifted sideways or slowly down. As the willing sellers ran out of stock, the price moved sharply upward until more stock became available. When the number of available shares got too large, the price fell significantly.


    I picked Boots & Coots as an example because Axion is deja vu all over again, just in a different sequence and with much bigger numbers of shares. Showing readers what I'm talking about justified the $120 I splashed out to buy the data.
    7 Jan 2012, 01:08 PM Reply Like
  • bazooooka
    , contributor
    Comments (3688) | Send Message
    Do you mean "bigger" shares outstanding or float? Since Boots & Coots got to a 200M in 6/98 cap it seems like there must have been near 40M shares for that name (compared to Axion's 85M).


    "because Axion is deja vu all over again, just in a different sequence and with much bigger numbers of shares."
    7 Jan 2012, 04:33 PM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » Their share count started at 16.7 million in August '97 and soared to 30.5 million in March '98 and 32.9 by November '98. At the May '98 peak the market cap was $250 million while stockholders equity was stuck in the $20 million range.


    Boots always had a smaller number of total shares and a far smaller public float.
    7 Jan 2012, 11:29 PM Reply Like
  • DRich
    , contributor
    Comments (4819) | Send Message
    >JP ... Really? [quote] there are very few students of supply and demand inflections because they're rare [quote]. I'm rather surprised. It never really occurred to me that it might be little understood.


    Inflection points are my buy/sell points, which I (wrongly) refer to as Support/Resistance lines and how I define trading range. I guess that is what I get for only following 3 Trading Rules.


    1) Trend - In on the Left out on the Right
    2) Buy & Sell at inflection (price change on volume change) or Rule 1 is violated
    3) If you're not making money, you're not making money. Get out & wait [consolidation/distrib...


    Although I don't follow my own rules as well as I should. Axion is my only really big exception.
    7 Jan 2012, 12:39 PM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » My biggest concern is with rigid TA types who tend to build rules about how long a run should take or when resistance levels will set in. These supply and demand things are real fuzzy and they don't tie back well to conventional charting analysis. Patience is important.
    7 Jan 2012, 01:10 PM Reply Like
  • 481086
    , contributor
    Comments (3431) | Send Message
    John, thanks very much for buying the data and putting this out. If you do ever make it up to the valley (and I can get time off from the walmart greeter gig ;) I pledge a good steak dinner to help defray the 120.. One question though, in this 16 month period that is covered here, were there any big business development drivers present? Any big positives or negatives? What about external economic factors? If I recall (fuzzily), 97-98 were pretty good years, except maybe for some turmoil with a mexico/asia crisis? I guess what I'm asking is were most of the other relevant variables pretty much steady? Were things basically steady going for the business and thus all that price action shown was due primarily to the supply/demand dynamics you describe?
    7 Jan 2012, 02:17 PM Reply Like
  • H. T. Love
    , contributor
    Comments (19568) | Send Message


    Thanks for the article. Being as new as I am, I had not considered the areas that you address.


    ISTM though that the additional supply, and its effects, don't invalidate TA any more than any other (un)expected catalyst that eventually appears in TA. I say "eventually" because TA is always lagging in that the effects of any factors are (almost) always examined in the "rear view" and then projections forward of *possible* short, medium or long-term behaviors are made.


    Since the additional supply availability might be known in advance (aren't most of these "lock up" periods published?) I think that knowledge could have effect on price and volume action (maybe even in advance) and, if the analyst is on his game, that additional knowledge might make for a better forecast of the coming action.


    If it's not reflected in leading price and volume action, that lends justification to my *personal* view that TA is not enough and is why I strive to combine any other information I might have with what I see on the charts.


    ISTM that the difficulty will be in the effects' magnitudes: will prior support or resistance points have effect; will trends be completely broken or only partially; will behavior revert to what it was but in a new range? Etc. These seem no different than the everyday challenges of TA which must always operate with incomplete and (mostly) backward-looking information (unless one tries to incorporate what's not yet reflectd in the charts - then it's not pure TA I guess).


    Thanks again,
    7 Jan 2012, 02:27 PM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » There were three acquisitions on 12/31/97; 2/20/98 and 7/23/98. None were particularly exciting. Beyond that it was just a normal process of moving stock from weak hands to strong hands and building name recognition. It was an incredibly fun story since the team included every Red Adair trained firefighter on the face of the planet, but by the time Boots & Coots filed their 6/30/98 quarterly report they had a $200 million market cap for a $19 million balance sheet.
    7 Jan 2012, 02:39 PM Reply Like
  • amishelvis
    , contributor
    Comments (143) | Send Message
    This may be redundant,,,and repetitive, and redundant, but according to this there are three things to watch.
    1. TA technical analysis
    2. Supply and Demand
    3. Fundamentals


    I think the Fundi's always trump the other two, and as HTL says, shouldn't supply and demand be baked into TA. ? Still not sure I get it,,,as far as the separation of TA and S+D. ? I suppose it is to be used as an extra tool on the side.
    Either way, Thanks John, I think its very important to note that the Axion shareholders just absorbed a tremendous amount of shares this year. The mind boggles as to the potential of this situation, and its eventual outcome.
    8 Jan 2012, 02:19 AM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » TA is an extraordinary tool for guiding responses to events that play out over the course of a few days in response to news driven events. It's time focus is too tight to accurately predict price movements that arise from supply and demand dynamics. If you have reason to believe that the dominant market dynamic is driven by supply and demand rather than news, you want to make sure you're focusing on a longer time frame so that you don't pull the trigger in four days on a change that will play out over four weeks.
    8 Jan 2012, 02:47 AM Reply Like
  • H. T. Love
    , contributor
    Comments (19568) | Send Message
    There we go John! That's what I was missing. TA can still help there? Switch to weekly or monthly charts?


    But even on daily charts, where I try and get the next short-term moves, I'm trying to *project* what it looks like further out. But the further out I go, the more risk I'm wrong (like I need more opportunities to be wrong!). I think adding in the considerations about supply and demand that you've offered over time has helped me in recent action.


    Knowing the Quercus and SS stuff you made available allowed me to decide that $0.30 was my good double up point. It wasn't the low, but that's a usually near-impossible target for me (and also near-irrelevant when any reasonable target-price and time-frame are considered I guess). Also, that's what allowed me, with confidence, to forego early profit-taking and keep those shares even when we entered the high $0.3x-$0.4x range recently.


    If I was a pure trader, I would naturally have taken some profit and played the swings. I do only a little of that though. My two or three trading blocks will go, at some point, to generate dry powder to add on pullbacks or rotate to something else (back to Exide maybe? Options are looking attractive on a longer time-frame ATM).


    Well. I think I'll meander over to some weekly and monthly charts. It's probably to early for them to suggest much, but I better start getting used to what they look like now so I can recognize a significant change when they do begin providing useful signals.


    Thanks again!


    8 Jan 2012, 08:32 AM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » I suspect your type of TA, which is probably less rigid than some others, won't give you bad sell signals. If you look at the Boots charts I printed above the Friday-Monday transitions could have generated a number of poor sell signals to somebody who was a little quick on the trigger. Since I'm not a TA guy and typically own large enough blocks that I think of selling as a months long process, I don't know that I can put a much finer point on the differences. I just know that the last thing you want to do is trade out in the middle of a supply and demand run because getting out is easy but getting back in isn't.
    8 Jan 2012, 08:40 AM Reply Like
  • H. T. Love
    , contributor
    Comments (19568) | Send Message
    JP: "... because getting out is easy but getting back in isn't".


    Strange you should mention that - I've been considering a potential conundrum that's related.


    1. We (and others) that are long-term oriented are probably mostly "strong hands".
    2. We (and others) likely hold a large percentage of the float available to the market.
    3. Axion needs to raise cash in H1.
    4. The ability to do so in the most advantageous manner *may* need good liquidity as *one* of the factors, under certain circumstances, as you have posited in a prior comment.
    5. I assume that some combination of time, money inflow, PR, business development, ... will spark large demand (as we've apparently been seeing) that *eventually* (that's with EMPHASIS) fades at some elevated price point.
    6. If we (and others) are loathe to take short-term profits, reducing available supply and liquidity, are we running the risk of impeding Axion's ability to get the most favorable terms?


    One can see where I'm headed - would we all be better off if we all had some trading blocks that we were willing to release into the market at various price points so as to to assist the liquidity (enlightened self-interest here)?


    We might miss some upside. We might be trading pennies among ourselves as trading blocks move (in some cases) between us as we buy and sell.


    But once the raise is completed and Axion pps begins to respond much more to on-going business events, our core holdings should more than make up for whatever small upside misses we've experienced.


    All this in consideration of a post that suggested we might have as much as 42%, IIRC, of float "locked up" in our (and other) "strong hands".


    Add in that I wonder if "strong hands" might reduce supply so much that valuations reach stratospheric levels much too soon and cause pps to tank in response as some of the "strong hands" (and others, maybe resulting in a substantial rise in shorting activity?) recognize that scenario and exit. I would much prefer a sustained steady rise on continuing good steady volume.


    ISTM that our risk is small in providing liquidity via trading blocks as we should expect a price retrace upon issuance of the new shares (well, depending on the conditions attached, if any) such that we can easily replace our trading blocks to bring us back to full strength. Good TA during that time-frame might be useful.


    Anyway, this may be all wrong-headed and the consideration may not be of significance, but I just don't know. And under such conditions, my associative processor kicks in and says "Hm, how can we avoid, or ameliorate, these potential problems?".


    I'd like to know your thoughts. And should I have put this in the concentrator (if it has any merit)?


    8 Jan 2012, 10:24 AM Reply Like
  • John Petersen
    , contributor
    Comments (30632) | Send Message
    Author’s reply » For the last 18 months it's been easy for me to pound the table on Axion because I believe its fair value was $1.20 in December 2009 and that value has increased significantly due to subsequent events.


    If the price gets driven too high by supply and demand imbalances, I'll take a very conservative position and tell readers that I think the price is getting out of line.


    I love strong hands, but once investors get to about a four bagger level many find it very hard to resist the temptation to sell, or at least take their cash out of the game by selling part and holding the rest.


    Once we get back into the $1.50 to $2 range, I think we'll see enough selling from bottom feeders to support an active and stable market.
    8 Jan 2012, 10:32 AM Reply Like
  • jakurtz
    , contributor
    Comments (1960) | Send Message
    HTL, trading block or not. I invested based on its value and I would have an extremely difficult time selling any amount for anything below what I deem a fair value.


    Good TA calling a potential strong resistance at .40 to .41 on Friday.
    9 Jan 2012, 04:47 PM Reply Like
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