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Could the Liquidity Theory Work for You?

23 June 2008 - Features - Editor

The liquidity theory asserts that the stock market is no different from any other market in that it is all a matter of supply and demand. The liquidity theory claims that stock prices are determined by the number of shares in the stock market, together with the amount of money available to buy them, irrespective of what their fundamental value may be. Stock market liquidity trends are analyzed and the information is utilized to predict in which direction the market is headed.

The liquidity theory is propounded in great detail, in comprehensible language, in the book “TrimTabs Investing: Using Liquidity Theory to Beat the Stock Market”, co-authored by Charles Biderman and David Santschi. TrimTabs was founded by Charles Biderman in 1990, and in 1995 he shifted the focus of the company to equity market liquidity involving surveys of U.S. mutual funds. TrimTabs is currently the only company tracking daily flows in mutual funds. In subsequent years the company underwent a number of changes including the development of valuable investment tools and information.

TrimTabs launched their Weekly Macro Analysis in late 2002, which assesses the strength of the U.S. economy through the use of real-time indicators such as online job postings and income tax collections. March 2006 saw the launch of the Sector Liquidity Review, which utilizes TrimTabs’ innovative liquidity approach to establish which market sectors are top performers. Testifying to its success, TrimTabs’ market calls-based portfolio showed a 27 percent return in the first year, outperforming the S&P500 Index by 21.5 percent. The company has since added coverage of the London Stock Exchange, Euronext Paris, Hong Kong Stock Exchange and Toronto Stock Exchange. The liquidity theory and analysis is proving to be an influential tool with regard to market timing.

TrimTab clients have reportedly been using the liquidity theory, with gratifying success, over the past decade. The authors are confident that whether you are managing billions of dollars or are an individual investor taking care of your own investment portfolio, “TrimTabs Investing: Using Liquidity Theory to Beat the Stock Market” will guide you in your efforts to beat the major stock market averages with minimal risk.

 


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