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What is Window Dressing? – Stock Market Terms Explained

Hey, it’s Sasha Evdakov and thanks for joining me here at tradersfly.com where I share with you some insight about trading, investing and the stock market.

This week’s lesson is all about window dressing and what is window dressing? So I want to explain what window dressing is, how it happens, why it happens, but more importantly, how does it affect you either as a trader or an investor? Even if you’re a regular investor. Not even if you’re a trader, just as a regular investor.

First off, what is window dressing? Window dressing is, if you apply it to window, it dresses up the window, it makes the window look nice.

On the stock market, we also have window dressing that happens throughout a period of the year. So it happens typically on a monthly basis it can happen on a quarterly basis and also on an annual or yearly basis as well.

How window dressing works

What this really does and what it’s really all about is, it’s all the big boys, all the institutions, the hedge funds, the mutual funds, all the large players in the industry that have regular investors, such as the retail mom and pop, your regular friend, your regular Joe that’s investing with the mutual funds.

They need to have some kind of report, whether that’s a quarterly report or at the end of the year to show these people what they were doing with their money. These hedge funds they need to pronounce this report and send it to them.

One of the worst things that they can go is show some really bad or unattractive names.

For example, if the hedge fund did really well and fantastic, then they can go ahead and show paper companies, staple companies, rugs, whatever, it doesn’t really matter, because the returns are great.

Showing some attractive companies

On the flip side, if the returns are average or sometimes below or even a negative return if you lost three or four thousand dollars on your five or ten thousand dollar investment, then they want to show some window dressing companies, they want to show some really nice companies that you are attracted to, or maybe that you think are favorable.

One of those more stable names that people just feel good about themselves when they hear about it, maybe a product that they use on a day to day basis.

And this just really makes them feel better when they see the report or the top 10 holdings when they get that sheet of paper in the mail.

It’s all about keeping investors happy

Think about it for a minute, if you’re just a regular person, meaning a regular investor with this mutual fund, and you saw that they invested in paper products throughout the year and the investment was horrible and you’re losing money, that wouldn’t seem as attractive as maybe a piece of chocolate or candy, it just seems a lot more delicious to have that than paper.

How often does window dressing happen?

What these large investors do that have everybody else’s money in our investing and in the stock market, they’ll trade out maybe their paper products or whatever other less attractive investments that did fairly poorly at the end of the month, or at the end of the quarter or at the end of the year, so it happens often, it’s not just once a year kind of thing.

It typically will happen at the end of the month, it’ll happen at the end of the quarter, and it’ll also happen at the end of the year.

What they’ll do is a few days before that is they’ll start rotating some positions, and they’ll start selling the paper products or they’ll start selling the less attractive names and maybe buy the more attractive names.

For example, today something that would seem more attractive or more favorable, especially when looking at it on a sheet of paper, especially for a regular person who is just giving their $5,000 or $20,000 or $500,000 to a mutual fund company to invest, something like an Apple, or a Facebook, or a Netflix, all these companies seem a lot more attractive, even if they’ve had loses, they just sound more attractive than something like company x, y, z, it just doesn’t sound that attractive.

That doesn’t mean they sell everything that they have of bad positions, it just means if they have 20 positions, what they may do is they may rotate them and they may rotate them to have a higher top 10 position or holding list, just to move those percentages a little bit in the favor, so on the report they can legally say that “these are our top 10 holdings”.

Why does window dressing happen and how does it affect you?

Why does this matter? Or what does it mean for you as either a trader or an investor? Number one, if you’re a regular investor and you’re giving your money to the mutual funds, the hedge funds or somebody else to invest in, they do this because number one, they need to legally disclose what they’re doing with their money.

But number two, they want to hold on to your money and make sure they hold on to it as long as possible, because it allows them to make more trades, make more investments.

It keeps their business operational; it’s the cash flow, because that’s the asset. So keep in mind that those statements that you’re reading even though they’re monthly or quarterly or yearly, that doesn’t mean that’s what happened throughout those years, months or days that they were doing their trading or investing.

Learn to identify when window dressing takes place

If you’re a more active trader, if you’re trading more frequently, you’re watching the market maybe on a week to week basis, and you’re actually trading on a day to day basis, then what you want to understand when this window dressing happens, is towards the end of those months, you might actually get some kind of selling that happens, or even some kind of pops.

You’ll start seeing rotations happening of certain types of companies and sectors and seeing other sectors and companies being bought out.

You’ll see a little dipping; you’ll see a little pop a few days before the end of the month. And then a little pop probably the first, second or third trading day of the month.

That’s typically what happens, but that means that if you have a great position in one of your companies or holdings, and maybe it’s not as popular or favorable, and it has a couple of days of drop, right before the end of the month, that doesn’t mean it’s a bad position, and then sometimes you’ll see it popping the first and second trading day of the month, because those big boys or the institutional investors are getting right back in it.

Don’t get confused

Those things sometimes can psyche a lot of the traders or investors that are new and don’t understand window dressing out, and you get out of your position and then it continues to run higher and you wonder what the heck happened during that moment or time.

Really that’s what’s happening, is that the big companies, the institutions are rotating their positions and getting out of those less favorable names and then transitioning to some of the more popular names and companies.

Some of the time frames which I’ve already mentioned when you want to pay close attention to this is, number one, at the end and beginning of the month.

Also the same thing at the end and the beginning of the quarters and finally at the end or the beginning of the year. So this cyclical 2015 to 2016 year, 2016 to 2017 year.

And then as well as a lot of times the end of option expiration. So The third Friday of the month, that’s when option expiration takes place. Really it takes place on that Saturday, but pay close attention to those couple of days right there, because a lot of times they try to pin that stock to a certain price point, which is a whole other video that we can do a discussion on.

But there’s a pinning action that happens and that’s why sometimes you’ll see certain stocks gravitate towards a certain price level when that option expiration week starts to come around.

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