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Is Costco Falling Victim To Algorithmic Trading?

|About: Costco Wholesale Corporation (COST)


Costco PPS punished in after hours trading.

The words "Material Weakness" jump out.

Are Trading Bots being used by High Frequency Traders to profit from one negative element of an otherwise good earnings report?

Monday morning I published a blog post outlining my rationale for buying (COST) Call Options in anticipation of a pop after earnings numbers were released.  It was aptly named:

Betting On An Earnings Pop For Costco This Week - Joe_Retail

I say aptly because of the word "betting".  A better word might have been gambling.  I explained my reasons, they were based on my opinion of the chart.  And based on revenues and earnings it certainly looks to me like the company is doing well and should continue growing for at least the next couple of years.  

I'm not one to argue with the market however.  I'm not going to cry and whine that I was right when the market said I was wrong.  I made a bad call and its going to cost me, that's the price of admission. 

In all my blog postings I always stress that I'm expressing an opinion and that my opinion could turn out to be wrong.  Barring a dramatic turnaround next week it looks like this is going to be one of those times.  

Live and learn.  Its often said that you learn more from your mistakes than you do from your successes, although frankly I was not looking to learn anything with this trade.  And even looking back I don't see any technical signal that hinted at a 5% drop looming for the PPS post earnings.

So why did the stock drop so hard? 

I think the obvious reason is the reporting of a "material weakness" in internal controls relating to general information technology.  But I do think that's only half the story.

A while back I was reading about a Stock Bot that monitors Donald Trump's Twitter feed.  Basically its an algorithm that monitors tweets from the POTUS twitter account and looks for comments on publicly traded companies. The Bot determines whether the sentiment is positive or negative and then engages in automated HF trading to profit from it.  Here's the article for those who want to read it:

A 'Trump And Dump' Stock Bot Is Cashing In On POTUS' Tweets -- For Animals

I think that is likely happening with shares of COST right now.  Costco released earnings and reported a "material weakness".  If there are Trading Bots monitoring Costco, and I think its a slam dunk that there are, I would wager they'd pick up on those two bearish words and that within nanoseconds shares would be located and then sold back into the market in order to profit from a falling stock.

Its kind of self fulfilling when you think about it. 

Tomorrow the CNBCs of the world will likely be reporting that shares of COST are down sharply after the company reported a material weakness in its internal controls.  Shareholders will see the dropping share price and no doubt some will be spooked into selling.  That will allow High Frequency Traders employing these BOTs to cover off with a nice profit in my opinion.

Longer term I think COST will be fine, it will continue growing and delivering long term shareholder value.  But I wasn't playing Costco long term, I was playing it short term with Call Option Contracts that expire next Friday, and it looks like I'm going to lose.  

Same disclosure as always, these are my opinions and they could turn out to be wrong.  In this case I hope I am wrong, I hope COST rebounds sharply Monday because I still own those Calls I mentioned.

Thanks for reading, comments are always welcome.  

Disclosure: I am/we are long COST Call Options.

Additional disclosure: You can find me in numerous forums where I use the names DrY (yahoo) growacet (stocktwits) ledrog (stockhouse), and avoidthebag on twitter.