- Trading updates and earnings reports can cause unexpectedly sharp moves in stocks
- Small caps have been out of favour of late
Summer may be coming to an end. But September is around the corner! Lots of trading updates and earnings reports will provide opportunities for traders in the next month. The final third of the year tends to be a good one and hopefully this year will be no exception. Of course, you only need one good trade to make money – even in a bad market. They’re just harder to spot. Sometimes that can also make the market sleepy. If nobody is looking out for a trade, then the risk/reward can be even better if everyone is eyeballing the same stock. We saw supermarket chain Sainsbury’s (SBRY) rally sharply on Monday as a result of The Sunday Times writing about potential private equity bidders. The Friday before, Genel Energy (GENL) fell in early morning trading with barely a gap down after a bad news RNS. Both of these trades offered high returns for traders with their finger on the pulse.
Small caps have taken a battering in recent weeks despite the indices hitting fresh highs. One problem for many traders and investors is that they don’t like to sell on dips. Once a stock pulls back, it’s tempting to think about waiting for the stock to reach the next high and then sell. It’s great to be selling down positions into strength, but if you want to ride trends you have to be comfortable with pullbacks. It’s likely that stocks can pull back 20-25 per cent in a trend, and 30 per cent pullbacks are also not uncommon. The decision we have to make is when to decide that the trend is over. Using moving averages is a good guide, as stocks are technically in an uptrend if the stock is above the 200 moving average. But it’s not nice watching a stock pull back 40 per cent to then bounce from the 200 moving average and continue the trend.