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Why Did the Market Go Up? at Trader’s Narrative




Why Did the Market Go Up?


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Everytime the market moves, people scramble to come up with reasons to explain why it did so. If the market went up after a certain event, like say, an economic report, then the move is attributed to that news. If the market went down and there was no news, then it may have been “a lack of buyers” or maybe the old standby, “profit taking”.

I sympathize with journalists who have to constantly write about the market and to concisely communicate to an uneducated general public what is happening. They can be forgiven for grasping at straws and giving explanations which really have no empirical legs to stand on. What else can they do? They’ve miles of white space and gallons of ink with which to fill them.

But my all time favourite is the explanation that many bandy about: “More buyers than sellers”. That is, if the market went up, it is explained by some as an unbalance between the buyers and the sellers. And if the market goes down, these same people say there were more sellers than buyers.

I’m sure you’ve heard this expression. But think about it for a second. Is it true? Can buyers ever outnumber sellers?

It may help to understand this by thinking about what a transaction is. I think of a transaction as concomitant agreement on price and disagreement on value.

In other words, I may agree with another person that my shares of Google (GOOG) should be priced at $550 but I disagree on the value of the shares. I value them less than he or she. That’s why we are able to engage in a transaction. I sell GOOG. The other person buys GOOG. But while we disagree on the worth of the shares, we do agree on the price - or there would be no transaction.

In this framework, can there ever be more buyers than sellers? No! Every single transaction needs to have both a buyer and a seller. Clearly then the explanation of an imbalance of buyers and sellers is simply incorrect. There can never be more buyers or more sellers. There must always be the same amount of shares on each side. Or all we have are bids and asks - no transactions.

So why then do prices move at all if there must always be complete congruence between buyers and sellers? Why does price fluctuate at all?

Well, it isn’t the amount of buyers or sellers but their psychological makeup. Prices move up because buyers are more aggressive in their desire to buy than sellers are in their desire to sell. And vice versa.

That’s why I cringe a little whenever I hear a trader or investor explain market moves by saying that there were more buyers or sellers. Am I being nitpicky? Maybe. This stuff will probably not make or break you as a successful trader. Although I would assume that if you are interested in the markets you would take the time to think about the underlying framework and how it all really works.

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6 Responses to “Why Did the Market Go Up?”  

  1. 1 yo

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    If you ever watch a level 11, you would understand that there are indeed many more buyers when the market is going up. They don’t all succeed in buying, but they are there and in spades.

  2. 2 Martin Gordon

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    It depends on how you define “buyer”. If you define it as “someone willing to buy” (vs. your “someone who has bought”), then there certainly can be more buyers than sellers. There’s competition amongst buyers to purchase the relatively scarce stock and they bid the price up until the price exceeds what some are willing to pay and those buyers get priced out.

    It seems like basic supply and demand to me, but maybe I’m oversimplifying things?

  3. 3 Babak

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    yo, I don’t think they are buyers, they are more aptly described as bidders.

    Martin, true. Since at any point in time those “willing to buy” can change their mind, evaporate or morph into “willing to sell” or actual sellers, I prefer to define buyers as those that actually engage in a transaction and not merely hint at their desire to go long.

  4. 4 Ugly

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    Even if you define a buyer as “someone who has bought” you can have many more buyers than sellers. For example, let’s say I own 20,000 shares of GOOG and I decide to sell them all. Twenty people can each buy 1000 and there would be twenty buyers and only one seller (me).
    But if GOOG went down because I sold all my shares at the market, it would actually be more correct to say that GOOG’s price dropped because there were more buyers than sellers.

  5. 5 Markus

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    Better say: There is more buying power than selling power or vice versa.
    It is not the number of buyers or sellers who move the price but the volume which is eager to sell or buy. Therefore large players move the markets and are responsible for trends.
    As you maybe all know there is this nice book by Larry Harris about market mircostructure which provides some good insight regarding this topic.

  6. 6 Babak

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    Ugly,
    I see what you mean but that’s just semantics. You could have 1000 different people buying each one share while the counterparty is one person selling 1000 shares. It wouldn’t really matter. And I don’t think that’s what people are thinking when they mistakenly say “more buyers than sellers” is why the market went up.

    Markus, good point. I like that term. It expresses what goes on in the market more accurately. On a sidenote, Lowry’s most used indicators are called “buying power” and “selling pressure”.

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