Overnight, four iconic U.S. companies lost 49%. One of them, a reputable blue chip Dow component, wiped out four years worth of gains while investors were sleeping. What does this performance mean and can it be detected/avoided?
The biggest danger is one you are not aware of or can’t predict. For individual stock investors that’s gap down opens. Such overnight losses leave big chart gaps that often by-pass stop-loss orders.
October has been a particularly treacherous month as four iconic U.S. companies lost a combined 49% while shareholders were sleeping. Talk about a financial overnight coronary event.
In the night(s) from October 17 (Friday) to October 20, IBM (NYSE: IBM) lost 8.35% and wiped out four years of gains.
In the night from October 20 to 21, Coca Cola (NYSE: KO) lost 5.75%.
In the night from October 23 to 24, Amazon (Nasdaq: AMZN) lost 9.10%.
In the night from October 15 to 16, Netflix (Nasdaq: NFLX) lost 25.83%.
Is there a common trigger for all those coronary events?
Is it possible to detect and prevent owning stocks before an overnight collapse?
The chart below shows IBM, KO, AMZN and NFLX side by side.
Trading volume spiked every time on the day of the coronary, but there was no consistent pattern the day before (which was the last day to get out in time).
A look at commonly used technical indicators – such as moving averages, MACD, RSI, percentR – also shows no consistent pattern.
Netflix and Amazon were unable to overcome their 20-day SMAs the days prior to the gap down, but Coca Cola ‘slept’ above the 20-day SMA the night before it fell out of bed.
Amazon triggered an MACD buy signal the day before it tumbled.
The only way to avoid individual meltdowns is to invest in baskets of stocks via ETFs or other index-based vehicles. The link below discusses which type of ETFs are best in this stage of a bull market.
The One Common Denominator
There is, however, one common denominator, indicated by the little telephone icon. All companies reported their earnings just before the big gap down (either after the close or before the bell).
Do Gap Downs Foreshadow a Major Market Top?
Excessive amounts of selling pressure are a reflection of investor psychology.
Gap ups on the way up are a vote of confidence; gap downs show that investors’ confidence is eroding.
Erosion of confidence is one of the tell tale signs of an aging bull market. This doesn’t mean the bull market is over, but it shows that investors are becoming more selective.
The number of outperforming stocks shrinks as more and more individual stocks fall into their very own bear market. In fact, currently 31% of all NYSE stocks are trading 20% or more below their highs.
In other words, a third of all stocks are already in their own individual bear market.
A historic analysis of major market tops puts this deterioration into perspective and shows how close (or far off) we are from a major market top. It also shows which sector is the best to invest in right now.
Here is a detailed look at the 3 stages of a dying bull market.
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
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