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E-motions: Vol. No. 1, Issue No. 19 Brought to you by California News Tech (OTC BB: CNTE)
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By: Tai Nicolopoulos E-Motions Writer 01/09/2006 |
New Year's Forward Thinking Can Lead to Unfounded January Optimism |
1. Emotions in Focus: With Talk of a New Year, Investors Get Ahead of Themselves
Investors, just like everyone else, can experience the influence of how the media frames a news event or market issue. "Framing" is a term psychologists use to describe the way in which a piece of information is introduced.
This can be something as explicit as another piece of information presented beforehand, to things as subtle as a news source or other cues in the environment while an individual is taking information. While some of these factors seem as though they may not make much of a difference in the way we interpret information or make decisions, their influence can be enormous. It seems intuitive that someone either smiling or frowning before telling you a medical diagnosis would influence how serious you might believe your condition to be. What is less intuitive, but often equally true is that even an unrelated piece of information or environmental cue can still effect your perceptions on an unconscious level. Researchers have shown that a random pleasant or unpleasant encounter earlier in the day can influence participant’s interpretations of unrelated information later. Furthermore, the power of framing goes beyond merely positive and negative affect. For instance, if a decision making factor such as time or risk is made prevalent in the media someone is exposed to, that factor can become more salient to them, and thus more greatly impact their decision making.
Recently, an event that has been very salient in every aspect of life is the New Year. From attending parties, to remembering to write 2006 on all of one’s documents, to reading countless stories in the business section about the outlook for the upcoming year, we are constantly reminded about New Years. Along with this season comes a variety of ways in which our society tends to look forwards. We make predictions, and resolutions. We set and evaluate goals. We think about long-term growth. In the financial community, this can mean that investors, whether they consciously admit it, or not, may be thinking more about companies’ future prospects, rather than their performance in the previous quarter.
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2. The Big Movers and Why
Shortly before the start of 2006 two Heads Up™ recommended companies experienced these effects of New Year’s forward thinking, and created big opportunities for smart investors to profit. The first company, Bed Bath & Beyond, Inc. (NasdaqNM: BBBY), home wares and décor superstore, released earnings on December 21st and went down 10% at the intraday low. The company had issued a cautious forecast because it had failed to meet third-quarter sales expectations. Despite successful increases in sales of holiday-specific merchandise right around the holidays, the timing of the earnings release encouraged investors to think more about longer term consequences. In particular, investors focused on depressed overall sales, outside of the end of December so-called Santa Claus effect, and the stock went down dramatically.
Meanwhile, Christopher & Banks, Co. (NYSE: CBK), both online and brick and mortar store for women’s sweaters and gifts, said it expected to record a pretax charge of about $1.4 million in the fourth quarter. The company is in the process of giving out remaining contractual payments to Bill Prange, who resigned at chief executive and chairman earlier this year for health reasons. Despite this set back, Christopher & Banks, Co. still expected increased profits. After taking the tax, charge into account, the company said it expected earnings between 14 cents and 15 cents per share, based on increased sales of a new line of higher-end sweaters, compared with earnings of 11 cents per share last year. Analysts, on average, were looking for earnings of 15 cents per share. After the company released earnings on December 20th, the stock went up 9% at the intraday high. Because investors were in the mindset to consider the long term success of Christopher & Banks, rather than the short term problems the company is facing, the stock went up significantly.
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3. How to Use the News
Whenever there may be factors in the media priming investors with a longer investing timeframe mindset, investors need to consider not only how this media influences them, but also their fellow investors. In terms of how New Year’s more long-term and optimistic thinking effects one’s own investing decisions, realize that look ahead can be a smart move, but still consider the factors that may influence a stock’s value. For instance, are there seemingly more short term factors, such as press or rapid changes in profitability that signal a more permanent change of the direction the company’s future? Also, depending on length of time one holds a stock for, sort term buzz versus a company’s future prospects may be more or less important.
In terms of better understanding how other investors’ mindset will influence their trades, and in turn a stock’s value, consider how investor’s time-related mindsets will shape the way they interpret incremental information. If they are more long-term-oriented, positive news about a company’s plans for the future may improve how investors take a quarter where it underperforms. Alternatively, investors may ignore other information that is not relevant to the time frame with which they are concerned.
In either case, the smart investor should consider all of the information available about the media sentiment surrounding a company, using tools like MediaSentiment Trend™, while at the same time reading the popular financial press to get a better sense about the view point from which the rest of the investment community views a stock or sector.
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4. Last Week in Media Sentiment
This last week was a period of the quarter with relatively few companies releasing earnings. Unfortunately, this low level of activity meant that MediaSentiment Heads Up™ did not collect enough data to yield statistically significant recommendation accuracy results.
Instead of the correlations between Heads Up™ recommendations and next day stock price and volume that we usually present each week, MediaSentiment™ would like to introduce some exciting results from a recent Heads Up™ performance report.
In order to take the first step towards offering more powerful and specialized service, MediaSentiment™ conducted the first version of a series of on going performance studies, measuring the predictive success of Heads Up™ recommendations alone as well as in concert with supply / demand indicators. The study began with a sample of Heads Up™ recommended stocks, with analysis of their earnings releases, either rated with a thumbs up or thumbs down, from the past three months, N = 318. For version 1.0 of the study our comparison included two supply / demand indicators: the Commodity Channel Index (CCI) and Stochastics.
The result of combining these technical indicators with earnings release sentiment recommendations is that Heads Up™ enhanced by technical indicators signals bigger opportunities to profit on stock highs and lows in the subsequent trading period. Results are divided by indicators of high demand and low demand, or thumbs up versus thumbs down.
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And when technical indicators are added...
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To summarize, based on historical price changes between stock open and close, there are more opportunities to trade with a larger pool of Heads Up™ stocks, but as the pool decreases, trading accuracy increases. In either scenario, however, recommendation correlations with stock highs and lows from the subsequent trading period remain high overall. With correlations in the 90th percentile, MediaSentiment™ lends investors a powerful and unique advantage.
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