This Is What Makes A Market

Published in Investing on 16 February 2012

Buy! Sell! Buy! Meaningless noise, or sound decisions?

For some unaccountable reason, brokerages love to send out press releases outlining the most-traded shares or funds over the previous week or month.

Sure enough, today's inbox contains one from broker TD Direct, a subsidiary of Canada's mighty Toronto-Dominion Bank.

And, as usual with these things, there are laughable -- if eerie -- parallels between the shares that people are buying, and the shares that other people are selling.

Perfect symmetry

Today's list is no different.

The most popular 'buy' last week with TD Direct's clients? That would be Gulf Keystone Petroleum (LSE: GKP). The most popular 'sell'? Er, Gulf Keystone Petroleum, again.

How about the second most popular 'buy'? That would be Lloyds Banking Group (LSE: LLOY). The second-most popular 'sell'? Er, Lloyds again.

In fact, the top six buys are perfectly matched to the top six sells, with only minor differences in ranking -- Barclays (LSE: BARC), for instance, as the fourth most popular 'buy', but the third most popular 'sell'.

And of the 'top 10' buys and sells, only four names out of the 20 shares that are listed fail to be both a top buy and a top sell.

In other words, shares such as Tesco (LSE: TSCO), Xcite Energy (LSE: XEL), Royal Bank of Scotland (LSE: RBS), BP (LSE: BP) and Range Resources (LSE: RRL) are being bought and sold in almost exactly equal numbers.

Split both ways

Now, to some extent, this can be expected. After all, logically enough, if someone isn't selling something, then someone else can't buy it. Which is one reason why I'm always dubious about the value of such lists.

But more to the point, among a supposedly sophisticated retail client base, we see opinion of a share's merits being roughly equally divided.

Is Tesco, for instance, a 'buy' or a 'sell'? People are jumping both ways. Likewise all the other names that appear on both lists.

Noise

In short, tables like this tend to reaffirm my faith in long-term buy-and-hold tactics, and index trackers.

People are selling shares that other people think are going to go up -- otherwise they wouldn't be buying them. Equally, some people are buying shares that other people rate as a 'sell'.

An element of de-risking and profit-taking explains some of it, but I suspect much of the rest is just market noise. And expensive market noise at that, as people cough up trading costs and stamp duty for the privilege of holding a view on a share that's diametrically opposed to the view taken by their neighbour.

Better by far, in my view, to pick a clutch of decent shares, and sit back and bank the dividends.

Feel free to share your view in the box below -- especially if last week you bought, or sold, one of the shares I mentioned.

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> Malcolm owns shares in Lloyds, Tesco and BP. The Motley Fool owns shares of Tesco.

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Comments

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BarrenFluffit 16 Feb 2012 , 6:01pm

I suspect that these tables reflect deal sizes more than anything. If I sell 1000 shares but they are bought in 3 transactions then the economic effect is nil but it might generate some stats.

GoldenSoldier 17 Feb 2012 , 1:47pm

"are being bought and sold in almost exactly equal numbers."

I am puzzled. Why is the adverb "almost" included?

Mike10613 17 Feb 2012 , 2:32pm

There is a Victorian market in the town I live in. Years ago you cold go around on a Saturday night before the traders packed up and pick up bargains. The traders outnumbered the buyers but the amount of good sold matched the amount bought. Many buyer would buy more than usual; but it was still a buyers market.

The stock exchange is now a buyers market for the same reason; there are more sellers than buyers but the amounts of stock bought and sold are equal. Open up the market to people with even less money and there will be more demand and the market will do well and prices will improve. Turn Britain in to a nation of capitalists, it's been tried before but the wealthy don't want the poor making money without work.

snoekie 17 Feb 2012 , 4:29pm

Mike, I disagree, this is not a buyers market, certainly not for me. Overcooked and too high with all the sovereign debt threatening to behave like a mud slide, with the debt raining down.

Now when it does happen, and it must, then will be the time to buy SOLID stuff, okay, the odd mad money investments.

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