DID YOU KNOW
About the Catalyst?
In our Do or Did You Know? blogs we provide readers with useful information that generally is not realized by inexperienced investors. In Chapter 1 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we introduce the concept of The Trend. What precedes any trend, however, is the catalyst that kick-starts that trend.
Every day in the equities markets is different for several reasons, but one of the most significant is The Catalyst. Though there are many factors that determine the value of an equity over time, the catalyst(s) is/are the largest driving force of price action at any given time, prior to the actual move, that helps guide the direction and size of an asset’s price increase or decrease. As a result, a true catalyst is one that will affect the market, or specific stock, immediately following the announcement. The initial reaction to the catalyst will normally only last for a day or less. Therefore, if the catalyst is revealed pre-market or during trading hours, it will be in effect for that day only. Once the market has had time to react during trading hours, the catalyst’ influence disappears, especially for day-trading. Some catalysts will last a bit longer for swing or long-term purposes, but the initial reaction has already occurred.
One major catalyst for any stock is the company earnings announcement each quarter. This report reveals the amount of revenue, per share, that a company realized over the prior quarter. That figure, combined with analyst expectations will result in a “beat” or “miss” of the projected results. However, with all the obtainable information these days, most companies do not “surprise” with the reported earnings, which has rendered that factor a bit less important. What has become progressively more important is the company’s forward-looking statement. This “outlook” provides guidance to sales and revenue over the next 6-12 months, which allows investors to gauge the future, rather than the past. Since longer-term stock prices tend to move on expectations, growth stocks often benefit from positive forward-looking projections.
Please note that trading just prior to “earnings announcements” is not suggested, as the implied volatility (expected price range move) can be much higher than normal. Only the highly experienced should attempt trading earnings, as they usually utilize more complicated options strategies to protect their capital.
Additional “daily” catalysts, include news items, upgrades and downgrades, overnight/pre-opening price moves of 1% or more, global market action, and Fed announcements.
Each morning, traders should search for potential catalysts by reviewing sector and trend strength/weakness, leading analysts’ upgrades and/or downgrades, earnings announcements before the open, or after the previous day’s close, and any pertinent news articles. This can provide an overview and sentiment for the coming trading session, and potentially identify a focus for the day.
One excellent source for research is BarChart (www.barchart.com), that provides a full summary of the previous day, and the potential catalysts for the upcoming trading session. In the Market Momentum tab, one can find information regarding indexes and sectors’ percentage of stocks trading over their moving averages on several time frames. In the Market Performance tab there is information including highs and lows, ratings, and the collective market figures regarding the same MA percentages (from the previous day), which assists in trend sentiment identification. The news tab is also updated each morning, pre-market, to help prepare traders/investors for the upcoming session. The article includes information affecting price action during the previous session, global overnight market movement, pre-opening earnings announcements, a list of economic data to be reported, and many other pertinent details.
The site is also very useful for analysis on equities, technical charting, as well as buy and sell ratings and recommendations for all types of investors.
Successful shorter-term traders and investors generally have a plan which includes pre-market analysis and preparation, which is highly suggested. Identifying the day’s catalysts are an important part of that process to assist in determining potential price action for the coming trading session.
*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
