Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Doing This Will Just Drive You Crazy

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Many short-term traders try to make money by guessing which way stocks will move on any given day. Yet by doing so, traders take on two separate but equally difficult challenges: figuring out what news items will have an impact on a given stock, and making a call on how the stock will react in response to that news.

You might think that guessing right on potentially crucial news items for a company would be far more difficult than figuring out which way the stock would move in response. But in the short run, the market can confound you by doing pretty much the exact opposite of what you would expect.

Being right but still losing
On Tuesday, an article in Barron's discussed how a trader had made a large bet on health-care stocks. To maximize potential profit, the trader had bought call options for millions of shares of the Health Care Select Sector SPDR (XLV), a sector exchange-traded fund that includes shares of about 50 different health-care companies, including Johnson & Johnson (NYSE: JNJ  ) , Pfizer (NYSE: PFE  ) , and Abbott Labs (NYSE: ABT  ) . By buying a number of options with strike prices slightly above the current share price, the trader evidently hoped to cash in on a big move up in the ETF's shares.

As the article pointed out, the timing of the trade was clearly pegged to the special Senate election in Massachusetts, which had huge implications for the fate of health-care reform in Congress. The logical theory was that if Scott Brown, the Republican candidate, won the election, then health-care reform would stop in its tracks, and health-care stocks would soar in response. And indeed, the ETF's shares rose during the trading day on Tuesday, as speculation built about Brown's chances of success.

As it turned out, the trader got the call right: Brown won the election. But look how health-care stocks responded:


Wednesday's Move

Johnson & Johnson




Abbott Labs


Medtronic (NYSE: MDT  )


Amgen (Nasdaq: AMGN  )


UnitedHealth Group (NYSE: UNH  )


WellPoint (NYSE: WLP  )


Source: Yahoo! Finance.

All told, rather than soaring on the election news, the health-care ETF lost about 0.9%. And although the options trader still reportedly had a profit on the initial options position, the calls the trader bought fell by almost 17% in a single day. How frustrating!

Selling the news
This sort of thing happens all the time throughout the financial markets. Investors try to anticipate what will happen next and invest accordingly. Yet even when they anticipate correctly, the way they chose to trade on that prediction turns out to be wrong; instead of giving you the payday of your dreams, your investment stays flat, or even worse, sells off, leaving you with a loss.

Unfortunately, there's no good way to get ahead of the crowd. Even if you buy early on rumors, you're still at the mercy of an irrational market -- and you can easily get bitten.

How to win? Don't play
As frustrating as it is sometimes, the lesson you should learn from this is that trying to guess short-term movements on stocks is practically impossible. Even if you believe that markets incorporate all known information into stock prices, it’s hard to figure out how quickly expectations about the future are incorporated into short-term price movements. That makes the markets look irrational even when they're not.

That doesn't mean you should ignore news items entirely. Over the long run, good news should have a dramatic impact on a company's business prospects, improving profitability and leading to better financial fundamentals. That in turn will generally push a stock's price higher over time.

So unless you see the stock market as a more convenient alternative to heading to your local casino, steer clear of making short-term bets on market moves. It will only frustrate you, and take your eyes off the ultimate goal of picking great investments that can make you truly rich over the long haul.

There's only one place to look for the best investments. Tim Hanson knows the one stock you must buy.

Fool contributor Dan Caplinger still makes plenty of predictions, but he doesn't trade on them nearly as much as he used to. He doesn't own shares of the companies mentioned in this article. Pfizer, UnitedHealth Group, and WellPoint are Motley Fool Inside Value recommendations. UnitedHealth Group is a Motley Fool Stock Advisor choice. Johnson & Johnson is a Motley Fool Income Investor pick. The Fool owns shares of Medtronic and UnitedHealth Group and has written puts on Medtronic. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy has a crystal ball, but it's out of order at the moment.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2010, at 1:00 PM, miteycasey wrote:

    I like the guys bet.

    The chances that Brown would win and health stock would go down would be considerably less than a Brown victory and stocks would rise.

    He made a good bet.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1089952, ~/Articles/ArticleHandler.aspx, 10/24/2016 5:18:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
ABT $40.50 Down -0.24 -0.59%
Abbott Laboratorie… CAPS Rating: *****
AMGN $158.51 Down -2.99 -1.85%
Amgen CAPS Rating: ****
ANTM $123.50 Down -0.53 -0.43%
Anthem CAPS Rating: *****
JNJ $113.44 Down -1.43 -1.24%
Johnson and Johnso… CAPS Rating: ****
MDT $83.91 Down -0.11 -0.13%
Medtronic CAPS Rating: *****
PFE $32.18 Down -0.36 -1.11%
Pfizer CAPS Rating: ****
UNH $145.37 Up +0.30 +0.21%
UnitedHealth Group CAPS Rating: ****