Trade Like An Insider

Some traders refuse to hold stocks through earnings reports. Others won’t trade ahead of earnings reports. But if you trade the intermediate term, some of your best breakouts may come a day or two ahead of these events. Take Gabelli Asset Management.

On Thursday, the investment firm
(
GBL |
Quote |
Chart |
News |
PowerRating)

run by Mario Gabelli reported that Q4 profits rose 13% thanks to growth in assets
under management. The company reported operating net of 51 cents a share vs. 49
cents a year ago and a penny above First Call/Thomson Financial’s consensus
estimate. Fourth-quarter revenue increased 20% to $59.9 million.

Note that the stock broke out of a
nice handle on heavy volume the day before. Somebody sure suspected something!
Lesson: Forget about trying to predict a company’s fundamentals. Let the stock
speak for the company. 

As observed four decades ago by href=”/.site/stocks/education/bookreviews/bom.cfm?th=87&id=97″>Nicolas
Darvas, a pioneer of intermediate-term momentum trading, you
don’t need connections to the insiders to become their “silent
partner.”  The stock price can often tip off what the
people-in-the-know are up to!

Quoting from Darvas’ classic, How I
Made $2,000,000 in the Stock Market
: “I figured that if some
fundamental change for the better takes place in the life of a company, this
soon shows up in the rising price and volume of its stock, because many people
are anxious to buy it. If I could train my eyes to spot this upward change in
its early stages, … I could participate in the stock’s rise without knowing
the reason for it.”

The top field of all charts in this
commentary uses a logarithmic price scale and displays a 50-day price average in
red. In the second field, a
blue relative strength line represents the displayed security’s price
performance relative to the S&P 500. The third field displays vertical daily
volume bars in black with a 50-day moving average in blue for volume.

All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business
. For further treatment of these and related topics,
check out the Money
Management
area of TradingMarkets’ Stocks Education section.