Tuesday, August 30, 2005

The Comfort Zone: Leapfrog Trading and Momentum Plays

Katrina rocks the Gulf, oil moves up, and the markets respond by moving higher?

Clearly, investors feel good about the employment report due Friday.

The market my friends looks forward, never backward.

What we're seeing here is what Mark over at BlogginWallStreet.com calls "leapfrog trading."

That's when aggressive traders leapfrog each other to buy into market shocks, making money by buying into event driven drops in the market and selling when things regress back to their mean.

If you notice, since September 11th, the markets have proved extraordinairily resilient.

Charles Kirk summed it best when he said earlier today that the "trading rule that continues to pay off lately is to buy when the news really stinks."

After the shock, equities return to their previous comfort zone.

Which means buying stocks is never limited to understanding fundamentals.

I know traders who've never made a cent by dissecting 10Qs, but somehow managed to reap millions off arcane stock charts.

Momentum matters.

(Disclosure: The Catablast! Media Group uses both fundamental and momentum "screeners" as part of its research methodology.)

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