The One Minute Millionaire Diamond Mine
 The Wealth Factor
 Stock Market Strategies
 By Dr. Stephen Cooper
     
 
 

Are stock prices real?

One of the debates that have been carried out in certain financial circles is the idea of “Market efficiency.” It goes something like this. Are the current prices of stocks and other financial instruments representative of realistic value? It is argued that by the time an individual investor considers the purchase of a particular stock, for example, all the reports (good or bad); future expectations or concerns have already been factored into the current share price.

If this “Efficient market” theory is correct, then it becomes challenging for a stock market speculator to find under-priced stocks to buy. Viewed on the whole, the stock market certainly does display price efficiency over time, but there is an important dynamic involved that opens windows of opportunity if you know how to find them.

There are, in fact, brief periods of clear inefficiency in pricing that allow individuals chances to cash in. Because of over-reactions to news or world events, whether good or bad, security prices may swing wildly. These over-exuberant buying or selling sprees pull prices into inefficient territory. The market will soon pull these inefficient prices back to a more normal range and thus return them to relative efficiency.

One of the best ways that I know of to make consistent profits in the stock market is to capitalize on these brief departures from normal/efficient territory by opening positions that benefit from their return to efficiency. I’ll show you what I mean.



Share prices of CAH dropped about $10 in one single day in July. This was an enormous percentage loss for CAH. When you see this kind of price change in one day, the first question that comes up is “Why?” What could be so terrible as to cause this kind of carnage?

How Bad is Bad?

Here is the interesting thing in all this. Quite often the bad news just isn’t so bad. This is an example of the over-reaction I mentioned earlier. Market participants–both professional and novice–very frequently hear some bad or good news and then just go crazy! When they do, we have a prime opportunity to make some money. What if we were to buy some shares of CAH after we checked the news and decided that the bad news wasn’t really so bad and that CAH is not going broke as the temporarily insane selling might suggest? On the next chart, we’ll add the price action that took place on the very next day after this incredible selling fit.



In spite of the unusual amount of selling and resulting price loss of CAH shares on one day, the very next day showed a good amount of buying and price increase. Enough people had woken up the next morning and said to themselves, “Hey, it’s not that bad. CAH is actually a bargain at this price. I think I’ll buy me some!” And buy they did.

In fact, the buying was not restricted to the day after the plunge but continued on through the date of this writing as shown in the third chart below.

The Insanity of Others can be Good for us!

There are a number of trading techniques that take advantage of temporary market pricing inefficiency. Until you become familiar with using them, it does take a bit of courage to go against the stampede of other investors and traders but if you do, the pay offs make it well worth the effort.

I suggest that you try this simple technique as explained here with paper trading first. Here is how to do it step by step. I call this “Slamming”

How to Become a Slammer

  1. Find stocks that have been hammered by 15% or more in one day. You can find these listed in the Investors Business Daily or at Yahoo Finance.
  2. Choose only strong Blue Chip companies to do this with, such as those listed on the NYSE.
  3. On the day following the slam, paper trade a small number of shares of the slammed stock.
  4. If over the next few days the price goes down further, buy more. This lowers your overall cost. Unless the company goes down the tubes your potential to profit in the near-term is very high.
  5. If the stock immediately rebounds after the slam day, sell your shares for 10% or more gain.

Conclusion

Though the stock market retains general price efficiency over time, there exist brief periods of distinct price inefficiency which can provide highly profitable opportunities for anyone willing to capitalize on them. By following a clear plan of action you can make excellent short-term gains with high probability trades. Open these positions with a small number of shares, especially as you are beginning. Be sure to first paper trade to gain experience and confidence before committing your dollars to the markets. If after opening your initial position, the price moves down further, consider buying a few more shares. If, on the other hand, the share price moves up after opening your initial position, take profits quickly. A series of 5%, 10%, 15% or 20% gains in a matter of days, will add up to enormous annualized returns–far more than mutual funds or other buy-and-hold strategies will likely accomplish.

 

   
 

Dr. Stephen Cooper is the Director of OnlineOption.com, a training and support Web Site for both beginning and advanced traders. Over the past four years, Dr. Stephen Cooper has been the primary Stock Market Trainer for Mark Victor Hansen and Robert Allen’s Enlightened Millionaire Institute. He has taught thousands of students his proven trading strategies. He is the author of The Online Option Trader, Windows to Wealth, and The Truth About Money. He has also authored 10 interactive chart analysis tutorial CDs and contributed to several newsletters and publications.