Take a Lap: How Traders Get Fooled by Follow-Through
A market you are watching advances, closing the session significantly higher
than where it opened. The next day that market opens above the previous day’s
close and finishes higher.
Two up sessions in a row. Time to buy, right?
Maybe so. But maybe not. Our research into what we call “lap up” markets
might surprise you.
Looking back on millions of trades from 1995 through 2006, our research
determined that, on average, traders would do better to fade, or sell, “lap up”
markets rather than buy them.
Hard to believe? These findings are certainly counter-intuitive, but there’s
no denying the actual, quantified record. As Larry Connors and Ashton Dorkins
wrote in a strategy article for our PowerRatings (for Traders)/Trading Markets
Stock Indicators section almost a year ago, not only do stocks that “lap up”
tend to have a negative bias, but also those stocks that “lap up” by more than
10% show a negative return on average of 1.12% after a week’s time.
By contrast, those stocks that “lap down” by more than 10% have been shown to
have a positive bias, tending to gain an average of 2.12% a week later. A “lap
down” occurs when a stock opens below the previous day’s close and finishes
still lower.
So, what “lap up” / “lap down” opportunities are in the market today for
traders to consider? Given the way the market has been moving (i.e., lower)
over the past few days, I thought it made sense to look at “lap down” stocks.
These are stocks whose holders are truly feeling The Fear, as the late Hunter S.
Thompson used to call it.
There were no stocks that lapped down by 10% or more on the roster today.
There were, however, more than a few stocks with “lap downs” of at least
5%–including three stocks that are “in the green” with PowerRatings (for
Traders) of at least 8.
The highest rated stock in this list is Rick’s Caberet International
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PowerRating),
which earned a PowerRatings (for Traders) rating of 9. Rick’s Caberet
International owns and operates “gentlemen’s clubs” which cater to an upscale
clientele of businessmen and professionals. The clubs can be found in several
states nationwide and feature bar and restaurant operations along with the live
adult entertainment.
The two other top stocks in our “lap down by 5% or more” listing are
Valhi, Inc.
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PowerRating) and China Southern Airlines Company
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PowerRating). Valhi, Inc., a chemical
company involved in titanium dioxide pigments, component products and waste
management, has a PowerRatings (for Traders) rating of 8. China Southern
Airlines Company, on the other hand, is the ninth largest airline company in the
world and the largest in the People’s Republic of China. China Southern
Airlines Company has a PowerRatings (for Traders) rating of 8.
David Penn is Senior Editor at TradingMarkets.com