Star-Bulletin news services
Don’t read too much into
daily stock market reaction
to news, earnings
NEW YORK » Earnings season is always volatile, but interest rate concerns have made Wall Street especially moody lately, with big block traders seeking short-term profits. For small investors unnerved by the resulting chaos, analysts say the best strategy may be to simply wait until the dust settles.
It's not that you can't learn from the decisions of professional investors; you just have to remember what motivates most of them. Few big traders are truly worried that rising rates will harm the economy; they just want to be sure they move their money before the next guy moves his. So while you're saving for retirement, your summer house or your kid's college fund, they're betting on where the market will go next, trading hundreds of thousands of shares, sometimes looking to cash in on stock price changes of just a few pennies.
Strategic "programmed trading," often done automatically on behalf of hedge funds, mutual funds and other large investors, may account for more than half of average daily volume. Beyond arbitrage -- the exploitation of price differences -- programmed trades could be based on any number of variables, such as market momentum, derivatives, formulas to discern technical trends, or fluctuations in bond yields and interest rates.
"There are all sorts of strategies employed for different reasons, some of which have nothing to do with the fundamentals of a company," said Sam Lieber, president of Alpine Funds, a value-focused family of no-load funds.
Over the long term, such trading probably has little impact on the market, but in the short-term it can produce "a lot of noise," Lieber said. This is especially true when companies are reporting results, he added, because "news can be interpreted in dramatically different ways."
For a smaller investor trying to navigate a choppy market during earnings season, there's very little to be gained by jumping in at the same time as all the big traders, said Greg Forsythe, a senior vice president of equity research at Charles Schwab Corp.
Paying attention to how the market reacts to a profit report is smart -- after all, these are "people voting with their wallets," Forsythe said. Just don't assume you should follow the herd.
"Professionals know what the consensus estimate is, they know the past growth rates, they're listening to the management and they react with a quick trigger finger," Forsythe said. "Smaller investors ... shouldn't try to outdraw the professionals in a duel."
The market digests news quickly, so the volatility related to quarterly results usually subsides within a day or so.
Unless the report contains a bad shock, which usually becomes clear immediately, investors with longer time horizons can afford to wait, Forsythe said. In addition to earnings, you should consider all the other indicators of good corporate health -- revenues, sales, cash flow -- and other measures that indicate strong profits are sustainable.
"The individual investor should be looking at this report as a once-a-quarter reality check, and see whether anything changes the long-term outlook for the company," Forsythe said. "Make your assessment carefully and slowly, not reacting to the price being up or down a dollar the day it happens."
If all this volatility still makes you nervous, there are some simple ways to protect yourself without watching business news all day, said Diane Maloney, president of Beacon Financial Planning Services in Plainfield, Ill. Most brokerage services will let you set up "buy orders" or "stop losses," which will automatically trigger a buy or a sell on a stock if the share price hits a level you specify.
Also known as "limit orders," these are standing instructions to your broker to make trades on your behalf. It's just like setting a VCR: If you buy a stock at $5, then see the share price rise to $6.50, you can set a "stop loss" at $6.25 to preserve your 75 cent profit. Conversely, if you have your eye on a stock but feel it's too expensive, a "buy order" authorizes your broker to purchase it for you when it falls to a price you like.
"Most investors are aware, to an extent, of the impact big traders have, and they see themselves as small ... not very strong or confident," Maloney said. "But these little, very simple ideas can give them more confidence and some peace of mind that they won't really mess up if they're not paying attention at exactly the right time."
The Dow Jones industrials ended the week up 20.87, or 0.2 percent, finishing at 10,472.84. The Standard & Poor's 500 index gained 6.03, or 0.5 percent, to close at 1,140.60.
The Nasdaq added 54.03, or 2.7 percent, during the week, closing yesterday at 2,049.77.
STOCK QUOTES/CHARTS/DATA
