Why selling after an institutional block ask is irrational but sensible

By , August 9, 2011 7:11 pm

Large institutional sale on the market should not be interpreted as a negative signal of the asset. Most if not all institutional traders are bounded by a variety of constraints (e.g. portfolio performance evaluation timing) and structured with investment strategies (e.g. exit or cut-loss thresholds). In fact, a block sale may also indicate that the investor has already reaped target return. I don’t see reasons for retailers to take action upon knowing a block sale, especially in markets when short-sell is not allowed.

Nevertheless, in a young market where the majority of mom-and-pop investors tend to panic at an institutional exit, selling the stock for speculative purpose is an option because the negative price effect that irrationally occurs might be permanent.

On the other hand, institutional purchase should be a good signal for the targeted assets. Whether for investing or speculating purpose, the introduction (or increased weight) of an asset to an institutional portfolio may be a result of privileged information.

Mimicking the long position in absence of existing strategy is one simple option.

Leave a Reply

Enter your email address:

Delivered by FeedBurner

Panorama Theme by Themocracy