This is How Institutional Traders Pick Great Stocks at Good Prices...

Mar 21, 2018

Apurva Sheth, Editor of Profit Hunter

When the markets are going down, some institutions are still managing to generate alpha.

I had always known this - but I had never really understood how.

Until June 2010, when I got a placement with the institutional research department of a broking firm.

My role there was to recommend trading ideas to financial institutions, like banks, mutual funds, FII's and insurance companies.

I worked closely with these institutions in one of the most difficult market environments - 2010 to 2013... Those were tough years for most market participants.

I watched as the institutions I worked with not only thrived, but they actually generated alpha in such markets.

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Today I will share strategy they used to make money in such difficult markets...

  • Select a group of sectors/stocks which they like

    Indian stock market was in a downtrend between 2010 to 2011. It started trending up in 2012. It was a shallow market and only a limited number of stocks participated in the uptrend. So, it's important to carefully select a group of stocks which you think could do well in the prevailing market environment. Back then, one of my clients traded only in export-driven sectors like IT, Pharma and Auto, which were benefitting from a weak rupee. Another traded only in Nifty stocks.
  • Identify best companies

    Once they selected sectors or a group of stocks they move ahead and picked the best fundamental companies for trading. Knowing that the company they are trading is fundamentally sound is comforting. They know there aren't going to be any negative surprises. Even if there are some uncertainties then they could be rest assured the company will bounce back sooner or later.
  • Identify best levels to enter/add

    After identifying the companies, they like to trade they would figure out the levels at which they would like to enter the stock or start building positions. They would use technical tools like support and resistance, volumes etc. to figure out the best levels. Apart from that they would interact with research analyst like me from various broking firms to get a sense of our views on the markets and the stock they are interested in buying.
  • Keep on churning in and out of the stock

    The story doesn't end once they have identified and bought stocks. Unlike retail investors they wouldn't buy all the shares at one go. They would gradually build positions over a few days and split share purchase orders across brokers. Once they have bought the number of shares they had intended to, they would start churning in and out of the stock. Banks traded on a frequent basis. Their minimum holding period was T+2 days. So they book profits even if they are in the range of 4-5% and enter the stock again if they get it 2% lower than their exit price. They would keep on doing so until their final target price is met.

    That's also what we recommended to do to one of our Profit Hunter Pro recommendation recently.

Now, that's not all, I have also recommended a stock yesterday based on the above strategy. This means the same stock could be on radar of institutional investors as well.

The stock I am talking about is from the IT space.

Now, I am bullish on the IT sector since I first wrote about them in August 2017.

Greed and Fear Phases in the IT Index
Greed and Fear Phases in the IT Index 

The IT sector cycles rhythmically through greed and fear every two years. I have drawn vertical lines with a gap of two years (24 months) starting from February 2007, which was a major top in the index.

Each vertical line represents the beginning of a new phase for the index. The vertical line on February 2007 marks the end of 'the greed' phase and beginning of 'the fear' phase.

So, the index rallied 109% between February 2005 to 2007, which was the greed phase. It dropped by 66% in the fear phase between February 2007 to 2009, and so on.

The IT index has entered the greed phase and will remain there till 2019 which means IT stocks have a long way to go from these levels.

Markets are in the danger zone currently and most stocks are trending lower. But that doesn't mean that stocks will continue to slide forever.

Markets will eventually find support and build a base. And while the market is doing so some stocks would have already bottomed out and will be up and running before anyone realises.

Normally, stocks from the strongest sectors move before everyone else.

And right now - the strongest of all is the IT sector.

I have identified this stock from the IT sector and recommended it to my Profit Hunter Pro subscribers last evening.

The stock has slipped lower from its all-time highs and offers a good entry opportunity for traders.

If you are at all interested in short term gains, this kind of opportunity is rare - this is one that you shouldn't pass up.

Happy trading,

Apurva Sheth

Apurva Sheth (Research Analyst)
Editor, Profit Hunter Pro

PS: Apurva's brilliant strategy of combining value investing with trading is paying off in a big way. If there was ever a good time to try 'short term' investing - this is it. Get his service here.

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1 Responses to "This is How Institutional Traders Pick Great Stocks at Good Prices..."

Karthikeyen

Mar 21, 2018

I had seen the same content just a couple of days back.
Also, lot of product promotions interspersed makes the flow difficult to locate.
Highly irritating to see the same promotions again and again and that too within
the text flow.

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Equitymaster requests your view! Post a comment on "This is How Institutional Traders Pick Great Stocks at Good Prices...". Click here!