There is a lot of talk about Apple Computer’s stock in the markets lately. The stock has an enormous market cap and is a large part of many people’s portfolios, either directly or indirectly as a part of a mutual fund. (Market cap is price times the number of shares outstanding) Due to its market cap, it has also become a driving force of the major stock indexes. Since the S&P 500 and the NASDAQ are market capitalization weighted, Apple makes up over 18% of the NASDAQ Index and over 4% of the S&P 500’s weighting.
Looking at the recent activity in Apple’s stock, we get a great example of why news should not drive our trading decisions and why following the crowd is dangerous. On April 25th, Apple released earnings where they exceeded expectations. This caused a flurry of buy orders that caused the stock to gap upwards. These orders are definitely fueled by retail investors who chase news and price. They bought right into a supply level. As an educated trader, I know that this is one of the worse things that you can do with your money.
We see that the hordes of people who chased price bought near the top of a strong down move in the stock. Instead, this was the opportunity to trade against the novice trader and short the stock for a nice profit!
As an example of insanity, (doing the same thing over and over again and expecting a different result), many people emotionally reacted to the recent earnings release for Apple on July 23rd. This time the earnings were disappointing and the immediate knee-jerk reaction was for panicked investors to sell the stock. This overabundance of supply from those dumping stock caused a gap down in price on the day following the earnings release.
Once again, those who fell prey to their emotions lost out as the stock gapped into a demand zone and proceeded to rise! I was speaking to a group of Online Trading Academy Graduates in our Stamford office on that day and showed them the opportunity to buy Apple while most investors and traders were running for the exits!
Trading from the news is an incredibly dangerous strategy. Become educated and think like the professionals, not like the amateurs. Online Trading Academy stands ready to help you gain this valuable trading knowledge.