A Reality Check for Traders

04/30/2013 6:00 am EST

Focus: STOCKS

Sometimes, we can get caught up in our internal narrative, using it as the justification for why a stock moved up or down, which can cause us to lose money, counsels Brian Lund of BCLund.com.

Perhaps you have heard the term “inside baseball” before. It indicates information, conversation, or an attitude about a topic that only would be relevant to “insiders.”

Like if a group of air conditioning salesmen were standing in the middle of a party discussing the merits of the Emerson 3560 Turbo Express heat exchange core and how it was revolutionizing the industry. Anyone overhearing the conversation would get the passion and the intensity, but not an understanding of the underlying subject.

It’s Like Trading
As traders we often get waaaaaayyyy inside baseball in our views of the market. We forget that there is a whole investing public out there that doesn’t know anything about MACDs, or Fibonaccis, support and resistance levels, reversal days, dojis, dark cloud covers, or how to short against the box.

Just Look at Apple
I was reminded of this by the action in AAPL last week.

When AAPL announced their earnings after the bell rang on Tuesday the stock was up as much as 17 points in the after-hours session, but by the time it finally closed, it was negative two points.

To me that was a very bad sign for AAPL bulls, as a stock that gives up that much of a pop, especially after a “good” earnings report, is ripe to be shorted. When the stock opened down 12 points on Wednesday morning it seems like my suspicions were confirmed. But then something strange happened.

Right from the open AAPL started to rally, showing green bar after green bar, pretty quickly erasing the gap down. I was genuinely puzzled by this as the action from the previous day’s after-hours session seemed like a very clear indicator of what traders thought of the stock. But I had forgotten about something; something “insider baseball-ish.”

The Public
It seemed as if the buys of the gap down on AAPL were retail buyers, which in retrospect made perfect sense to me. The vast majority of retail buyers don’t pay attention to after-hours (or pre-market) sessions. For them, the only time that matters for the market is the time between 9:30 am and 4:00 pm Eastern time. That meant that the after-hours action was not a part of their AAPL strategy. It literally was a missing piece of the puzzle that they never knew existed.

When AAPL gapped down, all they knew was that the company had a strong earnings call and they were getting a huge buying opportunity with a 12-point discount, so they bid it up.

Important Reminder
There was no short setup for AAPL at the open so I didn’t have any skin in the game, but, it was a very good reminder that no matter how much we think we know about the markets, scenarios, scripts, and story lines of what a stock should do are subjective. It also reminded me that there are other participants in the market besides those of us who live, eat, and breathe by each tick, and that their dollars can be equally as powerful, if not more so, than us “insiders” from time to time.

By Brian Lund of BCLund.com

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