The market is a perfect unity, where buyers and sellers even things out. Named Well, to some extent, that is actually true. But, before the 'evens things out "often overshoot the markings on both sides of the ledger. So let's say XYZ makes some big fuss about an upcoming deal they get. Soon the market is crazy buy it and XYZ is fly. Was the news really warm enough for XYZ to get in two days, or was it just 10 points a large impulse wave that was built and everyone wanted "in" before they missed the boat? We propose the latter.
On the other suggest that you see a stock taken down more than $ 5 per share simply because they declared their income would not "up to standard". Is that valid? We think not. Both examples are "reactions" and
once the hype and rush is over, then the market evens things out. For example, the second stock no less sales or revenues show, but simply had to deliver at a time when they could not get them recognized during the quarter. So, for a "timing" issue a stock lose $ 5 a day. That is crazy.
So why do we put this? Well of course we think that specific issues in a stock could make for a great long-term buying opportunity. (Not all smackdowns buying opportunities, if the stock had really blown it lose or turnover anything, that's another story.) And in the case of XYZ, there was a short sale made in heaven, once the initial hysteria over was. But perhaps more importantly, we know when we have into a frenzy about something.
Suppose a Friday, the day before a holiday weekend and we do very well. Then Monday as everyone on the beach we have a pretty good day. But when the sale of hits on Wed. we get "talking heads" screaming about how the market is not stable and can be passed down. They are the same guys screaming buy everything we need just two days earlier! See the point? Too much upside Friday and Monday, followed by too much downside Wednesday.
So, what we need to do is keen on big up days AND big down days to trade, but do not get caught up in the hype of overreact. We should take advantage of them. That does not buy XYZ after having gained 10 points in two days and did not think the world ends when to take a hit for the day averages (of course several weeks at a time is another story!) Look
overreaction on down days as a potential buying opportunity. How do you know
if it's something more than response or sell a real panic? Let's take a look at say a chip sector downgrade, say on a Wednesday, by perhaps a company like Salomon's.
The market needed to take after a few good days (not recently), and traders a breather got a little nervous about a few tech companies warning about profits. Then Solomon's downgrade. So they sell the chips hard. An overreaction? Well, the downgrade was because they were "too expensive" and rating downgrades are generally short-lived creatures. So what to do when that happens is watching the action in the next few days. If they are on the way back, the downgrade was a gift and again even if you missed the first few dollars of the move up, you are still cheaper than they would have been. Before the downgrade
The bottom line is this: the market exceeded just about everything.
If you base some of your transactions on those extremes by shorting the frenzy and buying the smackdowns, you will find that very often you have made a good trade. Just do not get caught up in the frenzy itself!
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