factor in achieving trading success. As already discussed, in
any market a continual run of positive fundamental news can
end up producing a situation where absolutely everyone who
wants to buy in that market has done so. In effect, there is no
one left to buy. So when the next piece of news comes out—even
if it is better than the market expected—no fresh buying can
occur. There are, however, plenty of longs (that is, buyers) looking
to take profit at some point. The longs then become, in fact,
potential sellers or, in market parlance, shorts. This desire to
consolidate profit can mean that the market will fall and even
accelerate to the downside after more good news. This process is
discussed in greater detail in the next section, and what will
become obvious is that the way market participants are positioned
is a factor not to be ignored. Although market positioning
is perhaps more of an art than a science, it is an art well worth
mastering.
WHEN GOOD NEWS IS WIDELY EXPECTED,
THE MARKET IS VULNERABLE TO A FALL
In any market, at any time, there are buyers and sellers. Some
need to act at particular times regardless of events; however,
most, such as business participants and speculative traders with
varying time horizons, can wait for what they believe will be the
best moment for them to buy or sell. If the media and market
research papers are awash with expectations and forecasts that a
particular stock is going to have an excellent profit result, what
are these business participants and traders most likely to do?
The following sections look at the effects of the expectation and
release of positive news, based on the market positioning of different
market participants.
The Buyers Looking for Stock
Clearly, those who need or want to buy will be fearful of not
being able to buy at the current price levels. At the same time,
these buyers will be excited by the riches they envisage they will
make after they buy and the profit result comes out. This is a
powerful combination of emotional forces. Fear is driving traders
away from any notion of delay. Excitement and greed is propelling
the trader to invest as much as possible. Traders are only
aware of the perfect “logic” of their decision to buy. After all, the
company is about to release a great profit result, meaning it’s
obviously a good decision to invest in this enterprise. The end
result is that those who were considering buying do so quickly,
and frequently in greater volume than they had originally
planned or need to.
The Sellers Holding Stock
On the other side of the fence sit the sellers for business and
speculation. How does their world look? Unlike the buyers, the
sellers believe they have it made. They are under no time pressures,
as they believe the expectation that the market will rally
handsomely after the profit result comes in to be perfectly logical.
They plan to just wait to see how high the market goes
before taking any action, and they are starting to think they will
make even more money than they had originally calculated.
Straightforward logic dictates that, for the duration of the
period that starts when the market first hears that a good profit
result is likely, buyers in the particular stock are going to be
aggressive and most sellers passive. The market price will tend
to rise in this environment, and to all participants the price
action merely confirms their expectations, so the belief in their
perfect logic intensifies. The process of buyers being aggressive
and sellers passive gains even greater momentum and becomes
self-reinforcing.
The Profit Result
By the time the result actually comes out, everyone who has
wanted to buy this stock, and even those who were planning to
buy after the profit release, has already done so. At this point,
every single buyer would claim it would be foolish not to already
be in the market. At the same time, absolutely every market participant
who wants or needs to sell but can delay doing so has
delayed. This leads to the situation where, in a complete reversal
of common market belief, on the morning the profit release
is due there are only waiting sellers in the market. The buyers
have already dealt their hand.
Assuming the good news does unfold, what happens next is
that everyone—the longs and sellers both—watch their screens
in barely contained excitement. Both are expecting to do extremely
well. Everything is going according to plan. Often, they
watch for a while and nothing happens. There may be a small
price rise but usually not a lot of volume in actual trading. They
all continue to watch.
Who do you think is going to act first? The sellers, of course,
because they have yet to do what they have or want to do for
business or speculation. Now here is the key twist—the sellers
are, in fact, everyone. The buyers have become sellers, almost
without noticing, and there remain only sellers in the entire
market. Of course, many of the buyers are there for the long
haul, or so they suppose. Still, there are several buyers who were
looking to make a quick buck in the hours or days after the
profit result was released. Now, after some time has passed,
these longs begin to wonder if perhaps that old adage “Buy the
rumor, sell the fact” is perhaps what they should be doing.
At this point, those who need to sell begin to execute their
orders. Next in line, the short-term speculative longs start to follow
suit. The stock collapses as more and more people try to lock
in the highest profit possible. Business reports on the evening
news are aghast at the carnage and at the fact that investors who
at the outset had been so obviously right end up losing money in
a bizarre market movement.
Read More: THE IMPORTANCE OF MARKET POSITIONING
