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A quick theory

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December 27, 2010 – Comments (7)

I would like to now what you all think about something I spent some time pondering this morning.  Due to the blizzard in NYC (and probably a lot of other places) the volume of the SPY was less than 1/3 of what it usually is.  Almost all of the momentum names got beat up (nflx, bidu, crm, ffiv, etc).  Although they all finished the day not down too badly (except nflx), they were all down near 2% at one point.  There are 4 posibilities for this (that I can think of)

1) The market was down, and these have higher beta so they were down more

2) They have been getting beaten down in general lately, so this was just a continuation

3) it was random

 

or

 

4) momentum names need high volume to keep them floating, and a low volume day hurts them.

 

If number 4 is the case, then you can buy a basket of puts ahead of blizzards for momentum stocks.

 

Any input/comments/observations would be greatly appreciated.

7 Comments – Post Your Own

#1) On December 27, 2010 at 5:27 PM, davejh23 (< 20) wrote:

Netflix is down on a warning from Barron's.  I'm not sure about the others, but I wouldn't be suprised if it continues to tank...I think many are worried about the high P/E multiple, and any sign that they can't "grow into" the stock price will send investors running.

Go back and look at volume this time last year...and the year before.  The low volume isn't really very unusual.  In 2008, the market rose on low volume the last week of December...in 2009, the market pulled back on low volume.  I wouldn't guess that the low volume has much to do with today's price action...there are plenty of other factors in play.  Doesn't HFT account for most volume on SPY anyways?  Weather shouldn't affect trade volume...

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#2) On December 27, 2010 at 5:28 PM, Mary953 (77.81) wrote:

Valyooo, I wish I knew the answer.  I think there may be a bit of reasons 1 and 2 at work here, but just in case #4 is the real reason, that would be a valuable tool.  There is one other possibility. 

#5) Somewhere out there is a really unlucky person who loses at every possible investment.  (S)he may have bought into these stocks and that action caused them to drop.  This is probably the same person that causes it to rain by washing the car just before you are planning to go camping. 

My own thought is that when it snows like this, investing is the last thing people are worried about and they ignore the market completely.   The market then acts rather like a car without a driver - by swerving all over the place with no discernable direction.

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#3) On December 27, 2010 at 5:34 PM, Mary953 (77.81) wrote:

Actually, I posted the warning from Barron's this morning here - http://caps.fool.com/Blogs/hot-stocks-to-watch-in/497313?source=itxsitmot0000001&lidx=2.  I was hoping for some guidance from other Fools on the stocks they discussed - Netflix, Chipotle, and Cisco.  Any thoughts are definitely appreciated!

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#4) On December 27, 2010 at 6:31 PM, PickThatBooger (28.60) wrote:

You know, I'm just going to take a guess here Valy, but I think it's a combination of EOY profit takers, mixed with Stock/sector rotation. Just an off the cuff guess. GL

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#5) On December 27, 2010 at 6:45 PM, Valyooo (99.35) wrote:

You're all most likely right.  Just trying to figure out my own methods :)

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