Icahn Sell-off Reminds Traders of an Important Lesson

We got a brief demonstration of how quickly losses can occur when chasing high-P/E stocks

   

The Dow Jones Industrial Average crossed above 16,000, and the S&P 500 made it to 1,802, but both closed under the round numbers. Stocks spent most of Monday’s session in positive territory until the final hour when billionaire investor Carl Icahn said that he could see a “big drop” coming.

The remarks were enough to send stocks into a frenzy of profit-taking. Technology and those stocks that have made big gains this year were hit hardest on a day when volume was light and there was little else in the news.

Despite Icahn’s remarks, the Dow Jones Industrial Average closed higher by 14 points at 15,976, the S&P 500 fell 7 points to 1,792, and Nasdaq lost 37 points to close at 3,949. Total primary market volume for the NYSE was 655 million shares, and the Nasdaq’s primary volume was 445 million. Total volume on the NYSE was 3.1 billion shares versus 1.8 billion for the Nasdaq. Decliners outpaced advancers on the Big Board by 1.6-to-1 and on the Nasdaq by 1.7-to-1.

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chart key 300x84 Icahn Sell off Reminds Traders of an Important Lesson

The daily chart of the Dow industrials appears like a normal follow through day after a major breakout. MACD even increased its bullish stance.

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But the minute-by-minute chart tells a different story. The market turned sharply south following Icahn’s remark. But a rally in the final hour saved the day for the Dow.

11 19 13 rut 300x272 Icahn Sell off Reminds Traders of an Important Lesson
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The high-volatility stocks, represented by the Russell 2000 index, were hit hard by the seemingly innocuous comment. The plunge occurred in only about 15 minutes.

Conclusion: All trends are still up. But Monday’s brief demonstration of the volatility of stocks selling at higher price-to-earnings ratios should be a lesson to all. Chasing these stocks can result in very quick losses.

Patience is the key to success. Traders and investors alike should decide what they are willing to pay for a stock and stick to it. And the use of limit orders is encouraged rather than market orders. Remember, “It’s a jungle out there.”

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/daily-stock-market-news-ichan-sell-reminds-traders-important-lesson/.

©2014 InvestorPlace Media, LLC

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