One of my biggest pet peeves as a trader is listening to the all the chatter after a company releases earnings about how “this person knew” or “that person knew” what the numbers were going to before they were ever reported. And these statements are then occasionally justified by looking at the price action before the earnings release. If the company reported a good number and had gone up prior to the release this is “evidence” that some people were trading on insider information. Of course no-one ever mentions the countless times a stock runs up into earnings and then reports a disappointing number and gets completed hammered. This doesn’t fit the conspiracy pattern.
Why is this type of statement so common among traders and investors? Some scientists posit that the human brain is wired to identify patterns, and because of this people may attempt to connect a series of random events. This wiring can be useful for traders attempting to build trading skills via pattern recognition, but also may have them focusing on things that lack any substance.
This brings me to the trading point I want to make. I discussed the unusual trading activity in VRSN the other day. That unusual activity initially occurred after VRSN withdrew from speaking at a technology conference. When a company withdraws from speaking at a conference at the last minute traders immediately begin to speculate on the cause. “Maybe they are about to announce a huge positive development” or “maybe they are about to receive a takeover bid”. As these rumors begin to flow orders are placed on the Street for the stock and unusual price action develops.
Then the various media outlets are required to write something, anything as a possible explanation as to why stock ABC has moved so much today. I receive emails and calls all the time asking me to speculate as to why a particular stock made a particular movement on a given day. My usual response is I have no idea. These articles are written regardless of whether there is any substance, which causes more people to place orders in the stock and eventually a larger move occurs further fueling speculation.
In the case of VRSN it ran up from 29.50 to 35 as the above circumstances unfolded. Then yesterday after the market closed they announced that their CFO was resigning. Apparently they were not being taken over, nor had they found a new superstar CEO to run the company. Any all the hedge funds and momentum investors who snatched up stock in the past few days were left holding the bag as the stock opened at 30.50 and by midday had completely erased the move that started Tuesday afternoon.
Apparently this time there was no conspiracy.