Ignore after hours market activity
This has happened to many of us, and it is unnerving. But you can ignore it. That’s right, ignore after hours market activity and stay the course. These moves are often on lower volume or turnover. There are fewer participants to create an illiquid market, and there is often a lack of conviction to sell. If you let fear win out, you will be punished.
This is especially true during earnings seasons. After an earnings report is released, prices are pushed around without much effort, the result of little pricing depth. That lack of depth is often a smokescreen. Oftentimes, the next trading day brings much better price action. Do not trust price action in the after hours market – or even pre-market.
Quick case study: Intuit
Two weeks ago, Intuit reported decent earnings but the stock was pummeled after the close. It was down 5% or so. With the hot money removed, the stock not only recovered those losses but tacked on another 6% to close at an all-time high. Those who panicked had to buy at a much higher price to get back in on the game.
Another quick case study: Google
Last Thursday, Google was showing a modest price rise pre-market. Volume was suspect, yet some news may have triggered bidders. I waited for the market to open before executing a trade, which in this case occurred about three minutes after the open. I bought the 1080 strike July monthly call for 34. By Friday, my call had doubled to 68, an astounding gain in one day. (I took it down and rolled up to a higher strike, so now we have a free trade working and cannot lose money regardless of what the stock does going forward.) The pre-market activity may have been a set up for this stock to move higher, but waiting for regular trading hours did zero harm.
So remember: ignore after hours market activity. It’s a smokescreen that can set you up to sell or buy at the wrong time.