preMARKET Activity ... and (maybe) an investment strategy

I was thinking about investor over-reaction to good (or bad) news.
A penny less in reported earnings and the stock may drop like a rock ... an over-reaction, I think. Then, later that same day, it recovers.
No, of course not. But suppose we know that a stock will open UP by, say, 2% from yesterday's close.

>Up 2%? Isn't that a large jump?
Yes, like a 200 jump in a 10,000 DOW.
Probably an over-reaction, so we might expect the stock to drop later that same day.
Look at Figure 1. ATYT is a very volatile stock so we might expect that large changes might occur frequently (from day to day).

>Very volatile?
Yes. Figure 2 shows some volatilites. (ATY.TO is the Canadian version of ATYT)
Anyway, look again at Figure 1. The stock price gapped up at the open on Nov 3, 2004 ... but dwindled during the day.

>Dwindled ... a common technical term, eh? But look at NT.TO!
In Figure 2? Uh ... yes. Nortel.

Okay, let's see if we could have made any money by selling at the open when the stock price is up dramatically, then buying later in the day ... say at the close. So here's what we'll do ...

>Wait! How do you know when the stock's going up at the open?

Figure 1

Figure 2
Here's what we'll do:

  1. We start with 1000 shares of stock and $3,000 in Cash.
  2. We sell all 1000 shares at the open when the stock increases by 2% from yesterday's close.
  3. We always buy back our 1000 shares at the close (regardless of price).
  4. If the stock price falls from open to close, we made money which we stick into Cash.
  5. If the stock price rises from open to close, we need to take some money from Cash to buy back the 1000 shares
    (because of the higher closing price).
Note that, at the end of the day, we always have 1000 shares of stock.

Here's the result, for that ATYT stock over the past few years

Look at the top chart.
It shows what happened to 1000 shares of stock over the six year period. That'd be a buy-and-hold portfolio. Not bad, but very volatile. The annualized return was about 10%.

Now look at the middle chart.
It shows what happened to our $3K Cash account over this period.
Sometimes we needed cash to pay for the 1000 shares at day's end ... when the price went up instead of down. ( That's why we started with some cash, to cover this situation :^)

However, mostly the closing price was down from the open and we could buy back our 1000 shares for less than we made on the opening sell ... and we put that extra money into cash.

The last chart shows the sum of Cash and Portfolio.
The annualized return was about 21%.

>Yeah, great.
Now all you have to do is KNOW when the price will gap up at the open!

True, but a good indicator is the preMarket activity.

Look here (which shows AAPL, another volatile stock).

The idea is to look at the early trading, just before the market opens. If it looks like the stock will open significantly higher then (I've found) it does !

Uh ... no, not always. Sometime ... if'n you're lucky.
We're making the assumption described here ... it works,sometimes  

Figure 3

November 5, 2004
As I write this (Nov 5, 2004) I'm looking at that ATYT stock again
(love that stock!) ... and I see this

>So you're gonna buy?
No, I'm going to sell at the open ... I think. But I'd like to see the price continue to go UP !!

>As we approach market open, right?
Right ... so I wait a bit ...

Figure 4
Then I see this as we get closer to the open (which is 9:30 AM ET):

>It's goin' down!
Yes, but it's still up over 2% so I'll sell 1000 shares at the open ... hoping to buy back later in the day.
>Let me know how you fare, okay?
Okay ...
  • At 9:30 I sold my 1000 shares of ATYT.TO (the Canadian version) at $22.50.
    Yesterday's close was $22.04. The opening price was up 2.1%  
  • At 9:40 I put in an order to buy 1000 shares at $22.00 ... and said a small prayer

>You trade ATY.TO but you look at ATYT preMarket activity?
Uh ... yes, because preMarket activity isn't available for ATY.TO ... ATYT trades on the Nasdaq.
  • Shortly after 11 AM I see this
>And you get excited, right?
Uh ... well, it's going according to plan, but I hope it falls further.
I'd like to buy back my 1000 shares, cheep.
>Don't be greedy.
Who? Me?


  • At 11:35 AM I get my 1000 shares at $22.00

>What if it goes even lower?
Don't be greedy!

By end of the day ...

'course, other things can happen ...

December 13, 2004
It's about 9:20 AM on December 13, 2004.
My brother-in-law phones.
He says: "Did you see the news? The CEO of Bombardier resigned."
I says: "Whee! The stock will drop like a rock! Bye! Gotta buy some!"
He says: "Maybe you should wait for a day or two."
I says: "No way! It's the over-reaction to bad news I'm looking at."

So I quickly login to TD/Waterhouse to buy some (at market), when it opens.
Aaargh! Bombardier has changed the stock symbol. Why did they have to do that on December 13 ?!  
However, I manage to buy 10,000 shares at $1.91 and ...
>Then you start praying?
Yes ... but it did close at $2.11 (on Dec 13), so that's a good start, eh?

>Then you sell ... when?
I kept track the next day, that's Dec 14, and sold the 10,000 shares at $2.30

>And did it go any higher?
I have no idea, but a 20% gain in 24 hours is good ... right?

>But maybe you could have sold even higher, right?
Don't be greedy ...
We're making the assumption described
here ... it works,sometimes  

December 21, 2004
So ATI Technologies (
ATYT on Nasdaq) had an earnings report this morning.
It looked pretty good to me ... so I checked the preMarket

>So you bought some?
At the open ... of course ... for $23.75, but the Canadian version, eh?
>Then you start praying?
Of course.
>So, if that earnings report was good, why did the stock go down?
Does it matter?
>And you sold later in the day, right?
Uh ... not exactly.
          Open = $23.75, Close = $23.40
>Now you wait?
Yes ...
          Open = $23.60, Close = $23.98
      ... and wait ...      
          Open = $23.92, Close = $23.71
>Waiting for Santa Claus?
Yes ...

for Part II