Charles Mackay
Day-to-day events in the market range from harmless noise to wild reactions. While day-trading is not the basis of our strategy, we do feel that there are 2-3 days every month that give us an opportunity to tweak our holdings and use emotions to our advantage. On rare occasions a few times per year, an actual signal builds out of what happens in the daily timeframe, and we take special note of those outliers as well.
Buy the Rumor, Sell the News
You've seen it. Great news comes out, and CNBC cheers in excitement. A deeper look at the context reveals that the market has been up for 9 of the last 10 days, so will strong market players really be buying based on this news? Unlikely. The prudent investor uses these short term bursts of euphoria to build a little cushion for the inevitable downturn that will occur at some point in the coming days.
A New Trend Emerges
A quarterly earnings report comes out, and the results sound mixed. However, management has a new confidence in their outlook as orders have grown. Analysts want to embrace the new information, but have been trained by recent eventsto tread carefully on this new information. However, the stock has launched itself out of a 2 year trading range on the biggest volume it's ever traded. Take note, a new era of explosive growth might be at hand for this company, and the analysts will be chasing their tails trying to keep up with positive developments over the coming months.
Are these rules fool-proof? Of course not, or everyone would adopt them and they wouldn't occur anymore. However, the natural wiring of humans doesn't change, which is why we see these patterns prove successful more often than not. Overreactions and underreactions each have their own set of behavioral triggers that have occurred since markets began, and will continue throughout the future. The key is using objective market-based clues guiding you to fade or follow this new information.
