Efficient Markets and the importance of stops
So in college finance classes they basically tell you that markets are efficient and that news is instantly priced in to the stocks price. I didn’t buy it then and I don’t buy that now.
With that in mind let’s look at BP’s chart.
Okay, I’ll accept that we didn’t what the magnitude of the spill would be on April 20 with the first explosion rocked the rig. But, for BP’s stock to go up on that news, really?
On April 22, the rig sunk, yet BP stock hung on. Amazing.
On April 24, we saw pictures of the well heard spewing oil. At this point I think the “rational investor” should know that these things are easily fixed. We had pior examples of rig explosions where it took months to stop the leak. Yet BP’s stock was still trading in the high 50′s.
So what did real investors think? Well, I’ll take a wild guess. The people in this stock were not perfectly informed of how bad these spills are. The only thing close to this disaster was the Exxon Valdez and that happened in 1989. That is ancient history on wall street–most traders (my self included) were 5 or 6 years old. So traders didn’t have a clue how bad this thing would be.
So what’s a person to do? I think trading off news is about the most difficult edge to gain in the market. I don’t do it. Instead, traders’ ignorance gifted shareholder’s an amazing opportunity to exit their position. In fact, the prior swing lows (areas of support) S1 and S2 were easy places to put your stops and save yourself a lot of money.
So for those efficient market proponents you can have your nice theory. I’ll take my technicals and get stopped out for a small loss any day.
