Share This letter with Friends on Twitter, Facebook and Other Social Networking Sites:
Reaction and Over-reaction -- By: Bill Kraft
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
One seeming constant I have observed over my more than a decade
of trading for my living is how the markets tend to react and often
over-react to various events and news. Have you noticed, for example,
how often a stock price will dip following an earnings announcement
even when the announcement is good? Sometimes, we see the price of a
stock literally plummet when it misses predicted earnings my a penny
or two. What causes these sharp moves?
At least in the shorter term, it is no secret that market
movement is a gret deal more psychological than logical. Have you
ever attended a home owners' association meeting where the subject may
affect property values and seen the raw emotion evidenced by the
crowd? How about the audience reaction at a governmental meeting
where a zoning change is discussed, or a half-way house is trying to
open in a community. Manners and civility are forgotten and a mob
mentality prevails. All I need do in one of these articles is take
any position regarding something like taxation or social security and
the battle is waged. The blog is filled not only with varying opinions
but also with vitriolic verbiage. Emotions simply take over and often
seem to overshadow reason.
I suggest the same kind of psychology often prevails in response
to stock market related events and news. A stock "misses earnings" by
a couple of cents and share prices fall $5 or $10. Does that make
logical sense? In some cases it may, but in most, it is an
over-reaction fueled by fear that the company isn't doing well.
If we take a moment to stop and think about it, what does
missing earnings really mean? In general, it simply means that an
analyst or a bunch of analysts were wrong in their guess. Truth is,
they are often wrong. The same is true about the predictions of
economists. They predict so many things including retail sales,
unemployment numbers, GNP, inflation, and on and on and, it seems to
me are correct about as often as the weather man. Rationally, we know
it is impossible to predict these things with complete accuracy, but
the irrational, emotional side of us often over-reacts when these
predictions (that we know from experience are often mistaken) turn out
to be wrong.
Who can predict tomorrow? If I as a trader say I think the
market will go up tomorrow and it doesn't, would that be a surprise?
Of course, it wouldn't. World events, a war breaking out, a terrorist
attack, a company failing unexpectedly, a corporate officer being
charged with a crime all could influence the market movement.
As traders, I believe it is important for us to be aware that
the markets react and over-react emotionally when a prediction of the
unpredictable fails to hit the mark. Though we may rationally conclude
that the failure of a prediction should not be unexpected, we can be
aware that it nevertheless can result in a market consequence. That
awareness can help us gain an edge in our own trades. In short, the
knowledgeable can position themselves to take advantage of the
over-reactions of the emotional.
Thanks to those of you who have been buying the new book, "Smart Investors Money Machine" , and to those of you who have ordered my
"TradersLibrary.com DVD" . I sincerely hope both add to your investment
successes.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
Consolidated Edison Inc. (ED)
Our Success Trading Group members scored another winning trade this week by
trading in and out of Consolidated Edison (Ticker: ED). We like ED for a
new position at its current price.
Have a great weekend and we'll trade next week.
Success Trading Group Team
Trade Quality
Stocks Over and Over Again
Over 320 winning trades and only 9 losses!
Register Now
and Get $50 off our Normal Website Rate
Option Trader -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses!
The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.
Here's a look at a trade Bill is currently working on:
Avon Products Inc. (AVP)
AVP has been in an uptrend and is approaching a resistance
at about $26.75 on the daily charts. On the weekly, there appears to be
a reverse head and shoulders with the neckline around the current
resistance. I am watching for a break above the resistance and
considering buying some in or near the money LEAPS calls with acceptable
open interest.
Good Trading!
Bill Kraft
Try our Option Trader Real-Time Alert Service
and Get $50 off our Normal Website Rate!
Achieve returns with us like
16.48% return in 5 days!
Trend Trader -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
Here's a look at a trade Bill is currently working on:
NYSE Euronext, Inc. (NYX)
NYX has been trending well since the March low. I am looking
at a couple of things here. First, a retreat to the trend and bounce
could offer an entry, but there is resistance at the $30 level. I am
considering entering a partial position on a bounce off the trend and
adding shares on a break above $30. If it doesn't retrace and breaks
above $30 that could also signal a potential entry point in and of itself.
Good Trading!
Bill Kraft
Try our Trend Trader Real-Time Alert Service
and Get $50 off our Normal Website Rate!
$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Here's a look at a trade Bill is currently working on:
Star Bulk Carriers Corp. (SBLK)
$10 Trader closed another successful trade realizing a 27%
gain in 16 days on SBLK. The stock is now dealing with the $5 level and
a move up off that level could signal another potential entry.
Good Trading!
Bill Kraft
Try our Under $10 Trader Real-Time Alert Service!
Dividend Investor -- by the Dividend Investor Team
Our Dividend Investor service focuses solely on the "best of the best" dividend paying stocks. We attempt to buy these stocks for their powerful dividend producing income; and we will also buy these with a purpose to make capital gains as the stock increases in value. Our Dividend Investor service is a perfect fit for an IRA account.
Register Now
and Get $50 off our Normal Website Rate
