Forum Archive Index - May 2002

["winner69 ." <wwinner69@hotmail.com>]

I thought this was an interesting article from the SMH on 22/5

Basically it says that '.....it didn't matter whether the share price 
recorded a dramatic rise or fall, the stock tended to underperform the 
market three months after the extreme event."

Anybody have any specific examples relating to NZ. THL and RMG not to be 
mentioned.

Full article
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What do you do when your shares skyrocket or suddenly plummet?
They're the stockmarket equivalent of an avalanche or a tsunami. Extreme 
one-day rises or falls in a company's share price that seemingly come out of 
nowhere and often disappear as quickly as they come.

Last week Austar shares jumped 35 per cent to 17.5¢ when directors forecast 
the company would break even this year. Brazin, Mayne Group, Coles Myer, Kaz 
and MIA Group are other recent examples of companies recording extreme 
one-off share price movements, most of them negative.

Sometimes there's a triggering event, such as a profit warning, a merger or, 
as in Austar's case, a forecast turnaround in earnings. Often a rumour is 
enough to send a stock soaring or plummeting. And sometimes prices swing 
wildly for no apparent reason.

New investors are often spooked by extreme share price volatility and decide 
that equities are too risky an investment.

Market professionals are often just as mystified by extreme market events, 
even if they don't admit it. Luckily, they have teams of people paid to 
think about these things and, occasionally, they turn up some extremely 
useful findings.

Macquarie Equities' quantitative analysts recently looked at 214 one-day 
rises of 20 per cent or more (10 per cent for top 50 companies), and 147 
one-day falls of the same magnitude over the 10 years to September 2001 and 
made an extraordinary finding.

It didn't matter whether the share price recorded a dramatic rise or fall, 
the stock tended to underperform the market three months after the extreme 
event.

One of the report's authors, Matt Hilan, says there are always exceptions to 
the rule but the theory held true for 60-70 per cent of cases in the 10 
years from 1991 onwards.

This is partly because stocks undergoing extreme one-day price movements 
tend to be long-term underperformers, and this trend persists after the 
event. The surprise, however, was that even stocks with positive earnings 
and price momentum before a sudden price spike were underperforming three 
months later.

The two main exceptions to the rule were also illuminating. In the case of 
extreme rises, companies involved in a takeover, merger or acquisition 
tended to slightly outperform the market three months down the track. Hilan 
says this is because a takeover offer puts a floor under the company's share 
price.

Where extreme falls are concerned, large companies defined by the study as 
the Australian Stock Exchange 50 Leaders slightly outperformed the market 
three months on. In other words, size matters.

Apart from takeover stocks and large companies, the study revealed other key 
factors that may help investors separate the one-day wonders from the 
genuine recovery stocks, and the short-term underachievers from the real 
desperados.

If a rapid price hike is not immediately followed by a correction, the stock 
is more likely to hold onto at least some of its gains.

And if there is a valid reason for the sudden rise or fall in price, rather 
than rumour or scuttlebutt, the price is more likely to continue in the same 
direction.

Almost half the cases in the Macquarie study could not be explained by a 
company announcement or any obvious event.

Market sector is also important. Speculative sectors such as 
telecommunications and gold are most prone to extreme price volatility, 
while customarily defensive sectors such as banks, property trusts and 
alcohol and tobacco are less prone.

Even so, there is ample evidence that the stockmarket is becoming more 
volatile, so investors need to work out strategies to deal with this.

Automated trading and computerisation mean that the swelling numbers of 
retail investors and day-traders receive the same information as the 
professionals, while Internet brokers allow investors to react to 
information almost instantaneously.

Despite this, behavioural studies have consistently found that retail 
investors tend to hold onto losing stocks in the hope that the price will 
eventually recover. They also hold on after a big price hike, hoping for 
more.

Hilan says investors could save themselves grief by selling after a big fall 
because in most instances the price will continue its downward slide and 
they will lose even more money.

And investors have much to gain by taking at least some profit after a big 
price rise, given that most extreme rises are followed by a period of 
underperformance.

Macquarie's study found that trading volumes remained above average for more 
than four months after an extreme price event. It suggested that investors 
take advantage of this and lighten their holdings while there are plenty of 
buyers and sellers willing to trade.



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