If you ask a day trader whether they think the market is going higher or lower over a period longer than a day, they probably wouldn't have a good answer for you. Now, it's not because they can't form an opinion. It's because it's not their job. Day traders generally don't take long-term views on a stock or security.
You see, a day trader starts their day in cash and ends the day like that. They might only care about a stock for a couple minutes, or even seconds, just for that moment they are in the trade.
Now you've probably heard that some traders are permabears. Now, that's true, to an extent. Some day traders prefer to trade bear markets, but why do you think that is?
The reason being: stocks are more volatile on the way down, than they are on the way up. You'll generally see stocks move a lot faster when they're selling off, and slowly grind higher when they're rising. Day traders like volatility, and they need stocks to have large moves, quickly. That in mind, higher volatility typically equates to more opportunities for day traders. The quicker the action, the better.
In addition to volatility, day traders also need volume. The more shares being exchanged-- the easier it will be for them to execute trades. In other words, traders need stocks to be fairly liquid, so they don't get eaten up by wide bid-ask spreads.
Here's the thing…
Volatility has been on life support, and trading volumes have been down recently. Not too long ago, Barron's wrote a piece on how the first quarter of 2017 was the least volatile on record since the 1960s.
From what we've stated earlier, you can imagine that this is a brutal environment for day traders. However, just because the overall market is dead, doesn't mean there aren't ways to make money from day trading. There are some stocks that have catalysts, which could uncover some opportunities for traders.
In fact, one common strategy used is mean-reversion. For example, on April 19, 2017, the equipment rental company, United Rentals, Inc. (NYSE:URI) announced its first quarter results, which is the catalyst.
The company released these highlights:
• Rental revenue (which includes owned equipment rental revenue, re-rent revenue and ancillary items) increased 4.4% year-over-year. Within rental revenue, owned equipment rental revenue increased 3.8% year-over-year, reflecting an increase of 7.0% in the volume of equipment on rent partially offset by a 1.4% decrease in rental rates.
• Time utilization increased 190 basis points year-over-year to 66.0%, a first quarter record for the company.
• The company's Trench, Power and Pump specialty segment's rental revenue increased by almost 17% year-over-year, primarily on a same store basis, while the segment's rental gross margin improved by 240 basis points to 44.4%.
• The company generated $106 million of proceeds from used equipment sales at a GAAP gross margin of 43.4% and an adjusted gross margin of 50.9%, compared with $115 million at a GAAP gross margin of 40.9% and an adjusted gross margin of 48.7% for the same period last year.
• The company generated $623 million of net cash provided by operating activities and $490 million of free cash flow3, compared with $604 million and $627 million, respectively, for the same period last year. Net rental capital expenditures were $113 million, compared with net proceeds of $15 million for the same period last year.
Source: United Rentals
These results were announced in the "after hours." URI shares closed at $119.45.
Shares of the stock initially moved higher after the earnings. However, as time passed, traders were able digest the information, which caused the stock to sell off by 6.32%, to $111.90, in the after hours. Now, this may have uncovered a trading opportunity in the stock.
If you looked at the options market ahead of the company's earnings release, the at-the-money options straddle was pricing in a 7% move. Now, option straddles are typically used to get a rough estimate on what the market is expecting, in terms of volatility, for a security. Now, since URI was down 6.32%, nearly in line with what the market was anticipating from the options straddle, it could cause some traders to think: The earnings didn't sound too bad. The stock is down about as much as the market anticipated, and the company has its conference call tomorrow morning at 11 AM.
That said, a mean-reversion trader might buy the stock in the morning, thinking the move is overdone and the risk-reward ratio is more attractive, if they get long.
On the other hand, the momentum or trend trader will look to short the stock-- believing that selling pressure will only intensify.
That in mind, opinions make markets move. One side believing that the stock should be trading higher, and other thinking shares should be lower, adds volatility to the market. If everyone believed the same thing, the stock would barely have any movements.
Now, what some day traders will do next is try to validate or disprove their idea. For example, traders might read what analysts are saying about the security, and see whether it received any upgrades or downgrades. Of course, listening in on the conference call-- can prove to be potentially valuable.
They are always checking the latest information to see if it still matches their thesis. No portfolio managers here. The only thing that matters is what happens this moment.
You see, day traders are not married to their positions. In some cases, they might not even care what the company does, just as long as it's moving and there is a chance to make a buck.
Some final thoughts on how to find day trading opportunities in a slow market:
Scan for stocks that have above average trading volume. Then, try to see if there is a catalyst pushing the stock higher or lower.
An earnings release is an actual event. However, there are tons of rumors that circulate throughout the trading day. Trying to figure out what is real from the BS can be profitable, if you're fast.
Scan for stocks that have gained or lost the most. They tend to draw a lot of attention from traders.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.