One of the consequences of an instant information world is that decisions must also be made instantly. When faced with an event, traders are forced to take action now and ask questions later. Often times however, the result is that instead of well thought out decisions, investors just make decisions. We have seen too many examples of a stock opening sharply lower, and then rallying throughout the day to finish higher.
Instead of citing numerous examples of where this has occurred (and possibly reliving memories we’d possibly rather forget), we thought we would share an example of where we think this is occurring now. On Thursday (3/22/06), YRC Worldwide Inc. (YRCW) lowered guidance by a wide margin, sending the stock down over 15%. In its news release, the company said that earnings would fall short of expectations due to lower shipping volumes, and not a loss of market share. Traders interpreted this data point as a sign the economy was falling off a cliff and sold off the stocks in the entire sector. When the dust settled, the transportation index registered a 2% decline on the day. Here's what happened to YRCW intraday:
We have several issues with extrapolating the negative news in YRCW to the whole sector: First, YRCW is still feeling the effects of a poorly executed merger which has resulted in the stock falling over 35% while transportation stocks have risen over 20%. This hardly makes YRCW a good proxy for the economy or even the transportation sector.
Secondly, one of YRCW’s two largest clients is Wal-Mart Stores, Inc. (WMT). Therefore, traders immediately assumed that weak volumes at YRCW meant WMT was weak, and therefore the economy was weakening. What traders may have missed though was that earlier in the day on 3/22 (1 pm) WMT executives told analysts that the company was revamping its merchandising strategy and one of the initiatives it was pursuing was to reduce inventory levels to lower “clutter