E-motions: Vol. No.
1, Issue No. 11, October 11, 2005
Brought to you by
California News Tech (OTC BB: CNTE)
Investors Buy on Rumors, Sell on News in
Uncertain Times
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Listen to
E-Motions Podcast available through
StreetIQ
1. Emotions in
Focus: Speculations on Seasonal Anxiety
Sometimes keeping abreast
of earnings reports and understanding the fundamentals of the
stocks in your portfolio is not enough to be a successful
trader. Despite the fact that it is essential to understand
the structure of the companies you trade, and getting to
earnings news first is essential to increasing your
opportunities for profit, sometimes impeccable market ![]()
timing requires something more. In particular, it
is critical to stay on top of the gossip in the
financial community preceding important company announcements.
In this age of instant high-tech communication, the truth of
the _expression_ “buy on rumors, sell on news” is
greater than ever.
There are a number of key
factors that make up the power of this concept, especially as
it affects current market conditions. These include seasonal
cycles for the stock market as a whole. These depend on
conditions including the volume of earning releases during
each part of the fiscal quarter, larger economic conditions,
tax cycles, and more. Recently, the market experienced a
period of uncertainty typical of late September.
Immediately before the spate of October earnings
releases and big market moves, there is a period of
uncertainty. During this time investors are at the same
time eager to make smart moves ahead of their peers, and
also are afraid of making the wrong move before the
final word is out in the financial news. The consequence
is that there is a late September to early October
period of tense gossip, where any advanced rumors about a
company’s performance can have a great impact on stock price.
The effects can either elevate or depress stock values,
depending on the nature of the rumors.
Oftentimes, these rumors
spread by high-tech information technology, from communities
of financial insiders to the larger investing community. More
so than in any previous generation of investors, the speed of
and ease of communication matters in trading. With
high-speed internet, and portable wireless
communications devices so widely available, the time
frame for important market events is getting narrower
and narrower. Sometimes legally, sometimes illegally,
traders use their instant messenger services, cell
phones and Blackberries to pass on any information they have
about companies to their friends and co-workers as they hear
it. This sort of communication can be particularly potent when
the parties passing on the information have some sort of
inside insight into the market, and elsewhere there is a
dearth of more legitimate information about a stock or
sector.
As a result of this intense
market reactivity to gossip, especially during traditional
times of uncertainty, many investors have adopted the strategy
of “buy on rumors, sell on news” based on the
premise that by the time an earnings release actually
hits the wire, the value of that news is already
reflected in the stock price because the preceding
period where investors traded the relevant stock up and
down on preliminary gossip. While this approach is not
always valid, and certainly depends on whether or not a stock
makes for a good long term hold, it is an important concept to
remember, and this pattern can be seen in many stocks.
2.
The Big Movers and Why![]()
Presented
By:
Last week the market
created some unpredictable stock highs and lows. Companies
with earnings reports that suggested that they would move
sharply in one direction, ![]()
ended up heading the other way.
Ultimately, however, these outcomes were not so
surprising, given the uneasy time in the market cycle,
and the fact that stock prices before earnings releases
were already elevated, and may have already reflected
rumors about earnings. In particular, Charles River
Associates, Inc. (Nasdaq: CRAI), an international
economics, finance and business consulting company went
down 19.29% on Thursday, September 29 at 8:31AM EST,
despite having just released a positive earnings report.
It is especially likely that Charles River Associates, Inc.
was prone to pre-earnings gossip, and resulting
overly-optimistic estimates, given that the company is, itself
finance related. Other financial groups and individuals may be
especially aware of the company and its performance, or those
trading CRAI may even have heard gossip from inside the
company through their personal and professional social
networks.
Additionally, Landec
Corporation (Nasdaq: LNDC), a producer of specialty polymer
products for agricultural and other applications, went down
-12.29% on
Wednesday, September 28 at 4:01PM EST despite positive
earnings reports. Here also industry gossip, rumors
about farming conditions, or a wide range of other
factors could have led to the build up in Landec
Corporation’s price in the week preceding its earnings
release.
3. How to
Make the Most of the News
When making future trades based on sentiment and
earnings, it is important to consider not only seasonal
market timing, but also to keep track of the news and
gossip building up before a company actually releases
its quarterly report. As many discussions of investor
behavior conclude, much of the action in the market
actually occurs before companies publicly announce
earnings, especially during times of uncertainty in the
market cycle. In order to keep up
with the rumors that can later influence stock prices, use
MediaSentiment Trend™ to follow the news stories
about your top financial picks before they are scheduled
to announce earnings. In this way you can keep ahead of
the pack and pick up on industry specific gossip when it
is still fresh.
When trading, keep in
mind that if there is a lot of buzz about a company early
on, by the time it reports, the company’s
performance for that quarter can already be reflected in
the stock price. If you are confident enough that the
buzz will stand up to the news, make your trade early
and hold your position. If you think the sentiment is
all talk, however, get out before the news is actually
released. Ultimately, in all of your trades, remember
that by the time insider buzz reaches a wider group of
investors, the opportunity for profit is likely largely over.
4. Last Week
in Media Sentiment
Last week's correlations
between MediaSentiment.com's thumbs up / thumbs down
recommendations for Heads Up rated companies and subsequent
stock highs and lows show a strong relationship. The
correlation between ratings for MediaSentiment.com selected
stocks and their highs and lows the next day is 90%,
explaining a vast majority of the variation in volume.
Therefore, this week, MediaSentiment™ gave an edge up to 90%
to smart investors who used Heads Up™ recommendations to
trade on volume!
All figures reflect all
MediaSentiment Heads Up™ recommendations for the week of
September 26, 2005 through September 30, 2005, rating
companies on the day of their quarterly earnings releases
correlated with their stock highs, lows, closing prices and
daily volumes for the subsequent day.
5. Links you
can use
Momentum Waves in
October
