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Some Market Action Observations -- By: Bill Kraft
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
One of the things I always emphasize when I start working with a
coaching student is that the markets tend to behave much more in
response to the psychological than to the logical, particularly in the
short to mid-term. Many retail traders seem to fail to account for the
relatively high levels of emotional reactivity in the markets in making
their trading decisions. As an example, have you ever noticed that is
not unusual for a stock price to dip or drop right after an earnings
announcement even if that announcement was not at all bad?
I am reminded of a situation that occurred several years ago. A
fellow who had come to one of my seminars called one day and told me he
had just bought a hundred or so short call option contracts on a company
he followed and that the company was going to announce earnings the
following day. I was astonished and asked where he learned to do that
because it certainly wasn't from me. He responded that he knew the
earnings were going to be really good. When I asked how he knew and
whether he had insider information he said no, he just knew the earnings
would be good. Sure enough, the earnings weren't bad, in fact just under
the analysts prediction and the stock tanked. Why? I guess we can never
know for sure, but that kind of action seems to occur with regular
frequency when the earnings miss some analyst's predictive guess. My
acquaintance lost a bundle and stopped trading.
News can certainly be a catalyst to price movement as well. As with
so many of the old saws, "buy on the rumor, sell on the news" has a
basis in experience. I would suggest the better approach might be to buy
on the rumor and sell before the news. What really seems to occur,
using the example of an earnings announcement as upcoming news, is that
there is speculation, sometimes wild speculation as an earnings
announcement approaches. As I am writing this article on Wednesday
afternoon, August 5, 2009, for example, AIG is up over 60% before its
earnings announcement on Friday. One squib I read indicated that was
because analysts anticipate it'll swing to a profit. Another analyst
suggested the jump was caused by scrambling shorts buying to cover
positions and said there was " ...certainly no news to account for it."
In either event, it is clear that speculation is extremely high on the
upcoming news. Shorts are clearly fearful and longs are basking in
fulfillment of their greedy side. What will the announcement be? I
certainly don't know, but I do know that once it is made, we will have
the answers and at that point, the questions will have been answered.
The guesswork will be over and the predictions either fulfilled or they
will have fallen by the wayside. In many instances (though certainly not
all) once the reason to speculate is gone, the wild swings are less
likely to occur. For that reason, I personally try to be aware of the
dates when earnings will be announced and may make a play going into the
announcement, but exit before the actual announcement.
Another example of market reaction relates to time of year. The
point is analogous to the preceding discussion in that it can also
relate to earnings season. Many companies announce their earnings in
the month following the end of each calendar quarter, for example. So,
for example, when the first calendar quarter ends in March, traders are
looking forward to the earnings announcements in April. Speculative
interest rises and "bets" are being placed as to how good earnings will
be; whether the earnings will beat the last quarter, or the same quarter
a year ago, or some analyst's guess (prediction). Once the earnings are
announced, the answers are at hand and the reasons for the speculations
are gone. The questions have been answered. Now, as the calendar reaches
May, there is no immediate excitement about upcoming earnings reports
for those companies that have just reported so, absent some other news,
things are more likely to be more peaceful. The same situation applies
in August, October, and February.
As with so many things in the market, I don't mean to suggest that
these are hard and fast rules. In my view, they are just factors about
which it may be helpful to be aware. If we take October as an example,
think of the crashes and drops the market has suffered during that month
over time. Last year, as one example, the Dow fell over 2600 points from
the October high to the October low.
Good Trading!
Bill Kraft
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Direxion Daily Financial Bull 3X Shares (FAS)
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Here's a look at a trade Bill is currently working on:
OfficeMax Inc. (OMX)
This week I ended a two month trade in OMX with a before
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level of resistance. As of Friday's close, the price had remained above
resistance but the move up was not supported by what I would consider
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the old resistance at $10 becomes the new support there may another
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Bill Kraft
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Here's a look at a trade Bill is currently working on:
ModusLink Global Solutions, Inc. (MLNK)
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Bill Kraft
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