When approaching a Big Headline Number that will be reported in the news media, it's often safe to short the stock or index as soon as the milestone is hit. We recently passed 2 big headline numbers recently: the Dow Jones Industrial Average at 13,000, and Apple (AAPL) at $600.
Here's my observation on what happens during these highly-hyped events, and my speculation on why it happens.
DJIA 13,000: February 21, 2012
For the DJIA, the index first touched 13,000 intraday on February 21, 2012 for the first time since May 2008. I was watching CNBC during this time, and they had the tick-by-tick chart up for almost 30 minutes, even warning their guests that they might have to cut away at any moment to report the occurrence. You could see it inching ever so closer minute by minute, and when it finally crossed the threshold, it sold off almost immediately.
It did cross 13,000 two more times that day, both times selling off more than 10 points within 10 minutes. The second time it crossed 13,000 that day, the subsequent sell-off lasted 90 minutes and took more than 70 points off the average before closing the day at 12,966.
Here's a 3-minute chart from that day.
Apple at $600: March 15, 2012
Today we saw another widely-anticipated milestone, the crossing of Apple past $600 a share. I was watching Apple in the pre-market this morning, and the bulls were trying very hard to push it up past $600. Finally, as the market opened, they had just enough buyers to push it to $600.01 at 9:31 am before it sold down below $594 at 9:35, and all the way down to $584 at 10:12, and a low of $578 later in the day. The $600.01 print was the high of the day.
Here's a 3-minute chart:
Why This Happens
To me, it's fairly obvious why this happens. Enough people in the financial industry have a vested interest in headlines touting "Apple $600" or "Dow 13,000", even if it's for a few brief minutes (or even seconds) that they will sacrifice a few dollars to make this happen. If they are an organization that caters to the retail trade where this headline might pull in someone who isn't already in the market, those are dollars well spent. They buy as many shares as it takes and then sell it as quickly once the headline is "in the can". Then, for the next few days, they happily answer the phone as the USA Today readers or NPR listeners call in their buy orders on the strength of the headline.
After the number is hit, the people who bought shares -- with the sole intent of hitting the milestone -- quickly sell what they can. This creates enough selling pressure to print red bars for the next few minutes, at least. This also may (or may not) create a chain reaction for the rest of the day, as we saw in Apple shares today. For Apple, I suspect it will take a few more days before we cross $600 again for real, when the actual buyers come in and hold their shares past $600.
Trading Big Headline Numbers
Any time you see a highly touted number on TV, where they spend days talking about it and then put up a tick by tick chart of the "big event", you can safely fade it for a quick short. The bigger the number, the safer the short. The retail brokerages don't mind paying a little advertising money for the news headline, and you can take some of that advertising money for yourself. The longer it takes the stock to creep up to the Magic Number, the higher the probability of success, because there will be a lot of buyers swimming upstream against the sellers -- buyers who will dump the stock quickly after the Big Number is hit. (Both Apple and the Dow Jones spent more than 30 minutes slowly inching towards the milestone). Make sure you put a tight stop loss right above the magic number in case something goes wrong.
This only works for the first try, or if it's been years since the milestone has been hit. No one cares about Dow 13,000 these days, that's so last month's news.
No Headline, No Trade
Make sure that the event will generate a big headline. No headline, no trade. The (SPY) S&P 500 index at 1400, for example, is not that big a crowd pleaser. ("What? Standard's and Poor? Is that baby powder? Oh no, that's the Almanac, right?") You can probably skip that trade, although yesterday they made a run for it and didn't quite make it (missed by 1/2 a point). It sold off quickly afterwards anyway.
In case you're curious, here's the 3 minute chart for S&P 1400, the first try:
Good luck trading the Big Numbers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I'm long back month AAPL puts, and I trade ES and VX futures.