“My happiness grows in direct proportion to my acceptance, & in inverse proportion to my expectations.”
– Michael J. Fox –
10 Reasons Stocks Go Down When You Think They Should Go Up
Unfortunately good news doesn’t guarantee a stock will go up. Likewise, good earnings doesn’t mean you should blindly buy the stock. So what gives? Why do stocks go down when you think they should go up? There are many reasons but as long as you are looking at the right stocks and your risk management skills are fine tuned being wrong doesn’t mean you can’t make money in the stock market.
- Short Sellers – Short sellers love to short stocks they think are overpriced or doomed to fail. In fact there is a whole community of short biased traders who never go long a stock. If they get their hands on a stock that doesn’t have buying volume your belief in a stock going up will be met with disbelief when it keeps selling off and can’t find a bottom. Don’t chase the stock up. Let the chart tell you the story. Don’t know what short selling a stock is? Click here.
- Gap Up No Follow – Everyday there are several stocks that gap up after hours or pre market but when the 9:30am bell rings there is no follow through momentum to take it to the next high of day. If a stock can’t gap up and go up more it’s time to re evaluate the situation before using pray and hope as a strategy.
- Profit Taking – Don’t forget there are many traders both retail and institutional that are looking to take their profits. Also, don’t forget about those bag holders who bought high before the stock pulled back. If it’s up again those people will be looking to sell to break even or for a small loss.
- Newsletter – Chat rooms can sometimes have hundreds and sometimes thousands of subscribers. Even if the main moderator tells his or her subscribers not to follow trades people do it anyway. This can cause a spike to the downside with volume and price action which could ultimately cause scared long biased traders to sell. Add in some short sellers and red will be all you see.
- Chart Pattern – Bear flags, head and shoulders and a descending wedge are a few chart patterns that retail traders understand as bearish signs. If the volume is there and all eyes are on a particular stock the chart pattern might give the red light to go short regardless of how good the fundamentals are.
- You Misunderstood The News – Good news seems like a great reason to buy a stock. Logically if something is said to be good people want it. However, if a thriving company is in line with estimates and doesn’t beat estimates that might be a sign of bearish news because growth is slowing down. That is why it’s always best to wait for the news to come out and watch the price action before buying your stock of choice.
- Unexpected News – Recently there was unexpected news that JP Morgan took a 7% stake in Genetic Technologies Limited (GENE). The stock spiked higher after hours as aggressive longs bought the stock and shorts rushed to cover. Then the following morning Benzinga stated that JPMorgan Chase and its affiliates ceased to be substantial holders of GENE (Click here to see the news). Had you not read the new news you would might have gotten crushed as it traded 20% off it’s highs.
- The Whole Market Is UP – Three quarters of stocks follow the overall market. That means that there is a 75% chance that your stock might go down or sideways the day the overall market is down. In addition if a particular sector is weak and your stock is in that sector you might find you have to sell faster than you planned.
- Stock Is Over Bought – A stock can only go up so much. If there isn’t a pullback or profit taking along the way good news or earnings can’t save it from a healthy sell off. It doesn’t mean your theory was wrong. It just means your timing was off.
- Expose – I recently shorted Advaxis, Inc. (ADXS) after it ran up from $3.50 to $13.88 in less than a month. I had been watching it for a week or so and each time I took a stab at the short side it pushed a little higher and I had to cover. They were featured on CNBC and promoted on various online publications. Then the expose came out which had a real negative effect on the stock price regardless of their 15 minutes of fame on tv. In 2 days it saw a 50% pullback. Ouch!
Well there you have it… 10 reasons stocks go down when you think they should go up. So, before you buy a stock because you expect it to go up dig a little deeper, watch price action and always have your hand on the trigger to bail out if your theory isn’t correct. You can always buy it again once the trend changes in your favor.