It’s a psychological fact that human beings are horrible at gauging their own emotional state. If there’s a thin line between love and hate the distinction between greed, boldness, prudence and fear can only be determined after the outcome is known. In real time your body just knows you’re stressed. If the trades you make while under pressure turn out to be profitable your actions are retroactively defined as bold, not reckless. If you sit the sidelines for years waiting for a crash that never comes your prudence morphs into money-losing fear.
This week seems to mark an aggressive shift in market behavior. After months of small moves and complacency the volume has been turned up in a huge way. The shift started when Facebook’s (FB) earnings beat triggered a big move that left many investors feeling left out of the party. Something in the collective mindset started to shift from a fear of getting caught exposed to stocks to panic over the prospect of missing the next big rally.
In the attached clip Yahoo Finance's Mike Santoli offers his best guess on the collective sentiment in response to Zuckerberg’s latest triumph. “The bar was pretty high for what they had to report and they surpassed it and the stock bounced nicely on it. That fed into Twitter (TWTR) where everyone was wrong-footed.”
Fool traders once and they’ll blame themselves. Fool them twice which was how they felt when Twitter rallied 20% on Wednesday and all bets are off in terms of doing research prior to chasing momentum.
Yelp (YELP) was bid up 10% on Wednesday ahead of its report last night, driven by little more than a mass desire to not get left behind should the stock pull a Twitter-esque rabbit out of the hat. LinkedIn (LNKD) tacked on 5% for similarly flimsy reasons.
Suddenly a lazy market became nothing but cruelly binary outcomes in response to any earnings report. Yelp beat estimates last night but the smart money bailed into the afterhours strength, this morning Yelp shares have given back all Wednesday’s gains and are $1 below where they closed two days ago.
The fates were even crueller to stocks like Glu Mobile (GLUU) which is down 17% on rumors of a finite number of Kardashian’s.
As a long-time shareholder of LinkedIn and Tesla (TSLA) which both report tonight it’s hard to know what, if anything, might be the appropriate hedging strategy. In the attached clip Yahoo’s Mike Santoli can only suggest that I’m right to be worried.
“The options market thinks they’re going to move 7 or 8% at minimum after this call. That’s not what the efficient market guys think should happen in response to one quarter worth of news.”
The risk level seems to have been dramatically ratcheted up over the last few days. In a month we’ll most likely know if this volatility is the dying gasp before a correction or just another buying opportunity. Until then the choices seem to be to sell everything and hide under the bed or stay long and load up on the relaxing drug or activity of your choice.
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