If you have been in this business for any length of time you're familiar with the term Window Dressing. Window Dressing can happen at the end of every quarter, but is usually most pronounced at the end of the fourth quarter. What happens is that mutual funds and institutional investors dress up their portfolios at the end of the year, or at the end of quarters, so that they appear to have been holding the stocks that have done best during that particular time frame. It is called Window Dressing because those mutual funds might not have owned the stocks when those stocks performed well.
Interestingly, however, there is another phenomenon similar to Window Dressing that takes place at the end of the year, and it is this that I want to talk about today. It's called Chasing the Market. Institutional investors engage in practices at the end of the year that essentially cause them to chase the market. This happens largely because the portfolio that they are in charge of is not performing as well as the market itself and the fees they charge are usually, at least in some part, tide to relative performance.
In situations where institutional portfolios are underperforming the market, which was absolutely obvious at the end of 2013, those institutional investors try to buy the market or stocks that they thought would increase aggressively as the year comes to an end. Looking back at 2013, one stock stood out as a prime target for those institutional investors who were trying to dress up their portfolios. That was Twitter (NYSE:TWTR). Institutional investors bought Twitter aggressively and influenced the stock higher, much higher than it should've been, causing smaller investors to chase the stock and drive the price up. This was easy to do because twitter had a good story and the float was relatively small at that time.
After the fact, Twitter fell on its face.
Now, as 2014 is coming to an end, there does not seem to be that same standout individual stock institutional investors are focusing on, so they seem to be looking at the market itself. They seem to be throwing caution to the wind as this year comes to an end, but more realistically they're actually engaged in the practice of Chasing the Market. They want their portfolios to outperform the market so they can realize performance fees, and therefore they seem to be buying the market whenever the market dips.
This practice of Window Dressing and specifically Chasing the Market is something that is quite obvious sometimes, and less obvious at other times, but absolutely is a reality and absolutely seems to be taking place this year. It is not taking place in the same manner as it took place last year, but we can clearly see that institutional investors have no interest in seeing this market decline as 2014 comes to an end.
That sets an excellent stage for 2015, but 2015 observations should be left for another article. This article is focused on the phenomenon that is taking place right now, and the relatively obvious actions of larger investors as they support the market on every dip.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receive consideration from the publicly traded companies listed herein for writing this article.