Page 515 - How to Make Money in Stocks Trilogy

384 INVESTING LIKE A PROFESSIONAL

Watch for Distortion around the End of the Year and in Early January

A certain amount of distortion can occur in optionable stocks around option
expiration dates. There’s also a significant amount of year-end distortion in
stocks during December and sometimes through January and early February.
Year-end is a tricky time for anyone to buy stock, since numerous trades
are based on tax considerations. Many low-grade losers will suddenly seem
strong, while former leaders lie idle or start to correct. In time, this mis-
leading activity dissipates and the true leaders reemerge.
General market sell-offs also occasionally start after the beginning of a
new year, which further adds to the difficulty. Fake-out action can occur
with one big “up” day followed by a big “down” day, only to be followed by
another big “up” day. There are times when I’d rather take a vacation in Jan-
uary. The January effect, where small- and mid-cap stocks get a boost dur-
ing January, can be a misleading and spurious indicator. At best, it “works”
for only a brief period.
It’s important that you stick with your rules and don’t get sidetracked by
questionable, less-reliable indicators, of which there are many.

Interpret and React to Major News

When domestic or foreign news of consequence hits the street, capable
market sleuths are sometimes less concerned with whether the news is good
or bad than they are with analyzing its effect on the market. For example, if
the news appears to be bad but the market yawns, you can feel more posi-
tive. The tape is telling you that the underlying market may be stronger than
many people believe. On the other hand, if highly positive news hits the
market and stocks give ground slightly, the tape analyst might conclude the
underpinnings of the market are weaker than previously believed.
Sometimes the market overreacts to or even counteracts favorable or dis-
appointing news. On Wednesday, November 9, 1983, someone ran a full-
page ad in the Wall Street Journal predicting rampant inflation and another
1929-type depression. The ad appeared during the middle of an intermedi-
ate correction in the market, but its warnings were so overblown that the
market immediately rebounded and rallied for several days.
There’s also a difference between a market that retreats in the face of
news that’s scary but easy to understand and explain, and one that slumps
noticeably on no apparent news at all.
Experienced market investigators have long memories. They keep records
of past major news events and how the market reacted. The list would include
President Eisenhower’s heart attack, the Cuban missile crisis, the Kennedy