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I want to look at
FedEx ( NYSE:FDX );
specifically let's talk about trading on rumors.
Let's assume you are not the guy
who's starting the rumor.
What do you know?
You know about a rumor that's been disseminated
from the guy; the guy meaning
whether it's a fund or the
subject involved in the rumor, in this case not so;
all you are is the person who's heard the rumor like many other people.
So what edge do you have?
You have no edge,
you're like one of those traders, I think it's towards the end of
"Trading Places,"
where the brokers on the floor go,
"Somebody knows something, come on let's get in on it." The bottom line is,
there's no advantage for you. What winds up happening is
you can be quick and nimble and make some money,
but generally speaking you're the sucker, you're the guy that's taking the
other side
of the trade. Here, if you look beneath the surface, you'll see that
the rumor is that
Bill Ackman is going to
takeover FedEx ( NYSE:FD ) or be an activist investor.
FedEx ( NYSE:FDX ) is a big company,
so you look beneath the surface
and you realize that his fund
is needing to raise one billion dollars in the next week
in order to do this
for a three-year lock-up period.
So that's pretty tough to do, particularly in a week.
Also,
it's a secret
that Mr. Ackman wanted to keep for obvious reasons; he doesn't
want somebody
jumping in front of him.
So you quickly understand exactly what's going on. The last thing you want to do is
trade on some silly rumor just because it's a rumor and you think you
have the inside edge. I mean how many folks do I know who traded on "quote" stock
tips? A bunch of them. How many folks do I know who have actually made money
in trading on stock tips?
None of them; similarly with a rumor,
if you're buying because of the rumor, sorry, I don't want to offend you but
maybe I'm going to offend you anyway; you're kind of a knuckle head, you don't
understand
the nature of rumors.
Typically
they don't pan out and that's why they're a rumor, and by the way even if
they do pan out, what's that old saying? Buy the rumor
sell the news.
So a lot of times it's a sell the news deal. That wouldn't be the case
if a big chunk of FedEx ( NYSE:FDX ) is being bought, I doubt
they're going to buy the whole company,
but that wouldn't be the case if a big chunk of FedEx ( NYSE:FDX ) is bought.
However, let's look at the intraday chart, this is what I really want to get to.
If you see a stock that's trading on some rumor, I don't mean a rumor that you
and your buddies know about, I mean a rumor
that is all over the financial media.
Forget about the rumor,
trade the chart,
that's really the lesson here. You see this stock moving,
it's not like the company beat
earnings or anything like that,
it's a rumor that may or may not be true,
that somebody is going to take a big stake in the company. It's same thing as some
rumor that
one company is going to acquire another.
Unless it's actually announced,
it is just a rumor. You can then make money
on this,
as long as you trade it intraday, as long as you realize what's happening,
and you do this;
you look for the volume to peak, which you only know it's peaked after the
fact, and that is when volume starts to taper off like it has here;
you look at where the stock actually peaked at that point.
So now you realize
at this point, at this magical moment in time,
when volume peaked,
that's when selling pressure started to pick up, at least where buying
pressure gave way
to selling pressure. And what happens?
This stock comes up, prints a higher high, but frankly, if you're trading the
way you should be,
you shouldn't be in this move, you should have already taken profits. You
missed the exact high, but only the liars get those,
and then the stock rolls over.
So what happens the next day?
Well the next day comes along
and here's your trade
once again;
stock opens up here,
starts trading higher,
once it breaks above
this initial level here you're off to the races once again from 103.00
to 106.00 or so, and then what happens? Volume
picks up here,
stock starts to drift, where's all the buying?
Nowhere to be found. So where are we now? Well we're setting up for Thursday.
You know what I would do with this stock on Thursday?
I would turn the page; if you want a stock to trade
buy UPS ( NYSE:UPS United Parcel Service ) on a pullback.
But here's the other thing that you've got understand. Just because
somebody's going to take a big chunk
in a company
doesn't necessarily mean that that company is going to turn around.
J.C. Penney ( NYSE: JCP ),
this is another stock that
Pershing Square
hedge fund took
a big stake in.
How about Herbalife ( NYSE: HLF )?
This is a common one, this one he's been shorting;
other than here when an SEC investigation that they started
came to fruition and the stock plunged,
where is it now? This is actually coiling
for a move higher. So my point is,
just because, number one, you hear a rumor
don't trade on it. You can trade the chart, but don't trade the rumor. Second,
just because somebody's going to take a big stake in it
look at the prior track record, I'm not talking about the
return of
a particular hedge fund manager; this guy is returning an average
of 16 percent
a year, okay good for him,
but bad for J.C. Penney ( NYSE: JCP ) holders, bad for Herbalife ( NYSE: HLF ) shorts.
So you don't just want to follow along with someone
for the sake of following along with them. Don't always assume that just
because a stock goes up it's necessarily a good development;
don't always assume that just because a stock goes down
it's necessarily a bad development;
you have to trade
the chart. If you understand the rumor
and you're trading the chart you're going to absolutely capitalize on these moves. You'll
make a bunch of money on these moves.
But again, you're not trading the rumor you understand the catalyst; now forget
about the rumor
trade chart.