Trying to time the market is never considered a good thing, however, I believe that certain opportunities can arise where a stock is either clearly oversold or overbought solely due to overreaction to certain events related to the stock or company.
I would like to use this thread as a forum for discussion for identifying and rationalizing these opportunities as they appear. As most leisure investors don't have time to watch CNBC 24/7 or sift through countless BS in Yahoo stock discussions (not that either of these are great options), it would be great for other like-minded people to present stocks or investments that they feel are prime candidates for benefiting from the all-time human fallacy of emotional reasoning.
My personal thought is that most of these opportunities will be relatively short term, so I think swing-trades would stand to be the best approach to take advantage of these situations. That said, it certainly wouldn't exclude someone from adding to a position or creating a new position in a great company when the right situation arises.
Lastly, I hate to do this and will probably get a nice FWF beatdown for doing so, but the concepts here are a more focused version of the ideas posted in tripleB's Fear-based investing thread. While the blog-like post of tripleB concluded that you should not invest based on fear, I would like this thread to be used to find opportunities to invest based on the fear/greed of others.
Message edited by: squid3 on 2009-11-05 23:14:06 CST
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Actually taking advantage of it? I think not possible.
You need: - data (stock prices, volume, events, event times, event categorization), - model (statistical model) of "events", including clear definition of "overreaction", - software to test your model, - infrastructure to back-test your strategy with realistic transaction costs, - infrastructure to trade.
Without the above, you might make money on a few lucky or successful bets, but you will not be able to make money consistently, at a decent scale, at low risk. Also, you will not be able to find out whether the money you made was due to actual success of strategy or lucky bets on other, unrelated "things", here and there.
Message edited by: BetterBrainBureau on 2009-11-05 23:03:39 CST
Today, CVS/Caremark beat earnings by $0.01, but basically gave enough bad news to make even the most optimistic question themselves. Stock dropped 20% on extremely heavy volume. Even before CVS acquired Caremark, they were full of debt, and now even more-so, however, many contend this is a great company in a great market/industry.
So is this 20% drop justified or is this a chance to load up on a good company that is getting beatdown by fear?
This is not a current example but last year when I was speculating in the market, I saw a one day drop in Merck and Schering Plough due to some bad FDA results on a single drug. Both stocks had something around a 25% one day drop. I decided that the drop was due to fear because this one drug couldn't have made up 25% of Merck's future profit stream. The VIX was at around 50 I think at this point in 2008 and the market was extremely volatile everywhere.
I bought a bunch of shares, and a few days later made 10%. Anyone holding Merck long term was screwed because it didn't recover fully, but it recovered from the fearful bottom I bought it at.
I recently was talking to someone who works for Merck and they told me at the time the drug did account for around 25% of Merck's profits. I guess I did get lucky.
A second case I "got lucky" was last year there was a point where hedge funds were shorting Treasuries and longing Munis to leverage a bet that the spread would decrease. Munis were yielding 5% and treasuries of the same duration 2%. The tax-equivalent muni yield was 7.5%. It was a sure bet for the hedge funds. Until treasury rates dropped to 1% and they had to dump hundreds of millions of dollars in munis to cover their short positions.
That one day drop in Munis was not "Efficient" and purely based on heavy hitters' bets failing. I put about 20% of my portfolio in munis, made 5% in a few days and pulled out. I knew I could have made more staying in longer but a 5% gain in a few days was enough for me.
The problem with the OP's premise is that anyone not sitting around watching CNBC daily, isn't going to check this thread daily, nor be able to research ideas in this thread to act on.
Message edited by: tripleB on 2009-11-05 23:58:28 CST
The premise is that the FWF investor might be able to respond to abnormal reactions to prices in stocks that are otherwise great investments. While I may not be able to check this thread daily, I can see a topic alert, decide how much time/effort I want to spend to research, and act accordingly. Tell me how CNBC is able to pull this off
That said, I have no doubts that some element of luck is involved in any "investing"
LOL, I remember having similar thoughts when I started trading... Thinking you know what's based on "fear" or "greed" is arrogant and downright foolish. The market reacts strangely for any of thousands of variables, not just those 2. Analysts are usually quite good at fundamental analysis and earnings predictions. They do this professionally and are notorious for not being able to make money trading.
FYI, as popular as it is to attribute all stock movement to "fear and greed", that doesn't have much to do with the black box trading that is 70%+ of volume today... This amateur coin toss analysis is all but certain to break your account. Even with proper risk management, which I'd bet my bottom dollar isn't being employed.
To get on the overraction you need to be really quick. Be able to understand what the news is about and what it means to the bottom line of a company.
I remember last year, or maybe it been 2 years ago when Wellspoint was raided by the FBI and the stock dropped 50%. Last year I remember when United Airlines had an old BK report reappear and dropped like a rock. But being able to get in on these moves takes balls of steel, being okay with the risk involved and knowing that it could very easily be wrong and it will continue to freefall.
Identifying Fear/Greed is a definitely a good way to play the contrarian but remember it is extremely difficult to identify if the price has reached bottom (due to fear) or top (due to greed).
Some one who was interested in investing in Lehman last year at USD 4.00 (as it had come down from a peak of around $100) - he was later happy that he did not do it!
CitiBank last year had looked a good buy at $27 (I remember some Abu Dhabi investor putting in a widely publicized investment at that price) - it kept looking better at every price below it - finally reaching $0.99. Anyone investing at USD 6.00 or above made a definite loss - but if you were lucky to invest at $0.99, then you gained. However, there was no way for common investor figure out where the bottom was going to be!
Same thing is true for tops - you can figure out the greed - but what you will not be able to figure out is the top - some of the prices from dot com boom keep reminding me that prices can become many multiples of the fair value - before finally bursting. And almost no one can successfully time this!
If you remember this and play it as a probability game with strong discipline, then there is good possibility of making some investment gains. (Following is my recent favorite article - explaining investment gains and trading gains)
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