What The Stock Market Isn't

I hate to sound like a broken record but THE STOCK MARKET IS NOT THE ECONOMY!. There are a number of actors in the stock market. Tracking their movements is the best way to understand what is going on in the stock market. The three most important groups are investors, corporations and private equity.
  • Investors are the largest group. This encompasses everybody from the long term holders like pension funds to day traders. The best way to track this group is sentiment. When sentiment has been positive for a very long time than this group likely does not have a lot of buying power because they probably have spent it. Conversely when this group has been very negative for a long time than they likely have sold and have plenty of dry powder.
  • Corporations can issue stock through secondary offerings or stock options.They can also buy stock through buybacks and cash takeovers.
  • Private equity can buy stock through LBOs or private placements and they can sell stock through IPOs and various other means. While this group is the least important it can be very important at certain times. Private equity helped burst the Internet bubble in 2000 by bringing to market too many Internet IPOs. They also helped cause the stock market bubble in 2007 with LBO activity.