E-motions: Vol. No. 1, Issue No. 4, August 15, 2005

Pre and After Market News Timing Crucial to Stock Prices

1. Emotions in Focus: Pre and After Market Reactions to the News
     In the lifespan of all trends, whether they are in fashion or the stock market, a point arrives where what was up comes down, and what was down comes up. The million dollar question, of course, is when this point will occur. In the case of the market, one of the variables that investors use to try to predict this critical moment is the quality of the media sentiment surrounding a given stock. Upon initial consideration, it seems self-evident that positive news will lead a stock to go up and then negative news will cause it to go back down, and vice versa. The complexity of this concept, however, comes in to play when investors must determine how the timing of news influences the timing and magnitude in price changes.

     In order to understand sentiment-based movement it becomes important to understand investors’ impressions of how everyone else on the market is reacting to news. If there is a sense that the momentum has gone out of a bullish or bearish trend, then they start to act in the opposite direction.

     If professional investors have the sentiment that too many people on the market are going to act on news, they begin to feel like it is time to do just the opposite. A wide number of potential factors may raise this concern about a stock’s momentum. The news itself may only be so positive or negative, the news may not be very prominently featured, or how many more people investors feel have yet to act on the news. Perhaps the two most important factors in predicting stock price after a news story are understanding these perceptions and understanding the market timing.

     When there is sentiment about a stock, sometimes it reflects, or is at least in line with the sentiment the stock’s fundamentals generate. When this is the case, the either positive or negative price trend it creates is larger and more enduring. When the news is just buzz, some short term event that does not reflect the fundamentals, the respective dip or rally is usually not as long-lasting. Often, if a stock is moving on buzz released during the early morning pre-market, even before the market officially opens, investors feel as though the stock has gone as far as it can. Nonetheless, what happens in the early morning after off-hours news releases sets the stage for the rest of the day.

     In fact, MediaSentiment Heads Up™ recommended stocks, rated with a thumbs up/ thumbs down on next day performance based on the sentiment behind their quarterly earnings reports, show that the pre-market is crucial to market prices. Last week on average 60% of Heads Up™ stocks’ daily variation occurred during the pre-market, emphasizing the importance of using services like Heads Up™ to get an immediate handle on market sentiment throughout the evening and early morning.

     Typically, companies release earnings reports in the early hours of the morning, or the evening, either when the market is closed, during the pre-market, or during the after-market. Active investors act immediately on the news during this pre or after market period and stock prices by market open have gapped significantly from their previous day closing prices. This gap can set the tone for the whole trading day.

     Ultimately, one of the most interesting and unexpected elements of the story behind pre-market pricing is that it is the individual investor who anchors prices at the beginning of the day and often creates the majority of stock price variation throughout the day. Traditionally, large institutional investors have been viewed as the entities that establish market prices and trends. These large company stock holders and fund managers, however, do not typically trade during pre-market and after-market hours. Within the past decade, this phenomenon of off-hours trading has gone from virtually non-existent, to a real opportunity for the individual investor who wants to trade early in the morning or after work to make money and be a player on the market. While the volume of such trades is not as high as during regular trading hours, the changes in price still make a difference and set the tone for the day.

2. The Big Movers and Why: Movement on Sentiment vs. Movement on Fundamentals
     Last week in MediaSentiment Heads Up™ recommendations, two stocks stand out as examples of the importance of the pre-market. The first company, BSquare, Inc. (Nasdaq: BSQR), released a negative earnings report close to the end of the trading day on Thursday. During the after-market, investors drove down the price of the stock by 8%, which continued to go down the following day. With so much negative news and the sizeable off-hours movement, BSQR eventually lost 18.92% of its value that day.

     The other stock, Emulex Corp. (NYSE: ELX), also saw action during off-hours, but unlike BSQR, went up. ELX Released a positive earnings report late in the evening on Thursday while the market was still closed. By early Friday morning, reacting to the positive earnings sentiment surrounding ELX, investors bid up the stock 9% during the pre-market alone. This pre-market 9% accounts for the majority of the total 12.46% price increase which occurred by market close Friday.

3. How to Make the Most of the News
     In order for investors to predict off-hours price gaps, it is important to understand how the timing of news will affect those trading during the pre and after market. Because it is not usually the large institutions trading during these critical times, it is valuable to understand the psychology of the individual investor. Here, the role of media sentiment becomes very important. Investors must understand how his or her peers will react to the news coming out during this time, and be able to respond to it quickly. Consequently, MediaSentiment Heads Up™ is a must-have tool in order to get an almost instant read on the sentiment behind earnings releases as they come out. Likewise, MediaSentiment Trend™ can offer an instant read into the general sentiment in the news about a given company.

     Furthermore, investors may be able to go a step further and predict whether or not a stock will experience dramatic price change before the market opens. For good predictions about how significant a movement in stock price will be, it is important to get a sense of the strength of the financial sentiment behind it. Is the news about real long term changes in the stock’s value, or is it just short term buzz? Are there more investors, including institutions, willing to buy or sell the stock at the current price? And finally, don’t forget the basics; how are the fundamentals?

4. Last Week in Media Sentiment
     Last week's correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up rated companies and subsequent trading volume show a strong relationship. The correlation between ratings for MediaSentiment.com selected stocks and their increased trading volume the next day over their three month average is 79%, explaining a majority of the variation in volume. Correlations between MediaSentiment.com's thumbs up / thumbs down recommendations for Heads Up rated companies and subsequent stock price show an even more powerful relationship. The correlation between ratings for MediaSentiment.com selected stocks and their highs and lows the next day is 83%, explaining a majority of the variation in highs and lows. Therefore, this week, MediaSentiment™ gave an edge up to 83% to smart investors who used Heads Up™ recommendations!

5. Links You Can Use

Trading the Red Eye Express

Individual Investors are Winning

After Hours Trading: How Does it Work?

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