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Action Plan

If a stock appears to be trading out of synch—repeatedly underperforming expectations despite a string of positive developments, regularly rallying on days when most other shares are lower, suddenly becoming active during sessions when the overall market is sluggish and all is relatively quiet on the news front—that can often be a sign of a crowded trade. Under those circumstances, the stock is likely to remain overshadowed by short-term supply-and-demand considerations until at least some measure of the imbalance has dissipated. Such a situation can present an excellent opportunity for patient long-term investors who are comfortable with their assessment of what the security is worth to accumulate a position at unexpectedly advantageous prices. For those with shorter investment horizons, however, the frustrations associated with such quirky and unsettling moves probably means it is better to focus on other possibilities.

While it is not always obvious, of course, one general rule of thumb you should keep in mind when exploring investment alternatives is to try and get a sense of how a security or sector—or even the overall market—responds to what appears to be unexpected information. If shares rally on seemingly bad news or sell off on apparently positive developments, that frequently indicates the data is more or less in the price. For investors, that would also seem to imply that perhaps it makes sense to discount those particular facts and focus on other issues. However, if a security or index seems to react both ways during a relatively short period of time, that sort of schizophrenic price action is often a sign that unstable technical forces are distorting the picture. If so, you should be especially wary about drawing too many conclusions from near-term trading patterns.


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