How many times have you heard someone say that they are going to buy a stock after it just soared higher on news or earnings? The answer to that question is probably 'very often'. You see, the public loves to chase equities higher after the bulk of the market move has already been made. The opposite is true and happens when the stock market declines, the public will generally begin to sell short around the lows, when most of the selling has already occurred.
Late To The Party
Many people have recently asked me how the SPDR S&P 500 (ARCA:SPY) can make new all-time highs after staging that sharp decline in mid-October. The reason that the SPY can rally to new all time highs is because many people in the public went short the SPY near the lows on October 15, 2014. Simply put, the crowd started to chase the market lower, after it had already declined by nearly 10 percent. The end result was that the public was late to the selling party as they listened to the media become scared and bearish in tone. As you know, the SPY found a low around the $182.00 level on October 15, 2014. This V-shaped rebound in the SPY caused the public to cover the short position by buying back the shares that they sold short after the market bounced. Once the short sellers buy back in/covering their position and the professional institutions buy equities, it causes the market to trade higher than normal. That's what is known as a short squeeze in the trading business. This was a classic example of the public chasing the downside in the market.
Another example of classic chasing came when Apple (NASDAQ:AAPL) traded as high as $700 a share (pre-split) in September, 2012. The public was once again all aboard the Apple story, but little did they realize that the professional money was distributing the stock to the public. In fact, the day that Apple topped out, CNBC ran a piece on the public's love for all things Apple. It showed investors with nothing but Apple stock in their portfolios -- a clear sign that the stock was poised to drop sharply. And it did just that, falling by more than 200 points in a few short weeks.
Remember, if you know nothing about reading a stock chart or trading stocks, you should know this -- never chase an equity after a major move has already been made. It would be better to wait for a pullback or a long-chart base before looking for a major price change. All equities have to retrace at some point in time. Remember that nothing in the stock market moves up or down in a straight line. The best thing any new trader or investor can do is to learn how to read the charts. By learning to read the charts you'll learn where the institutional money will generally support or distribute stocks.