Do you ever watch the trading action after hours with money on the line? Do you get stressed out or worried that a stock you own that's being taken down following an earnings report is going to hit your P&L badly the next day?
It happens to many of us. What we must tell ourselves, however, is that this shock of a move after hours is often on lower volume or turnover, which means there is a lack of conviction to sell.
The stock market is often a game of trickery. Yet if you stay the course and go with what is truly happening you may not get fooled. After-hours action is usually thinly traded, which means fewer participants creating an illiquid market.
In these moments, especially after an earnings report, stock prices are pushed around without much effort as a result of little pricing depth. That lack of depth is often a smokescreen and punishes those who take action during off hours. Frequently the next trading day(s) finds much better price discovery on a stock that might have shown much less activity after the markets closed the prior day.
My advice would be to not look at, trust or believe the price action in the after hours or pre-market. The intention is to fake out the crowd.
The Example of Intuit
Two weeks ago, Intuit (INTU) reported decent earnings, but the stock was pummeled after the close, down some 5% or so. The hot money removed, we now see the stock not only recovered those losses but has tacked on another roughly 7% to close Friday at an all-time high around $204. Those who did not wait patiently and panicked and left the stock would end up buying the stock at a much higher price today.
How We Played Google
Another instance last week was a modest price rise in pre-market trading in Alphabet/Google (GOOGL) on May 31. Volume was suspect, yet some news may have triggered some bidders in the stock.
I waited for the market to open before executing a trade, which in this case occurred about three minutes after the open (we bought the GOOGL $1,080 strike July monthly call for $34 at that moment). By Friday, our call had doubled to $68, an astounding gain in one day (we took that down and rolled up to a higher strike; now we have a free trade working and cannot lose money regardless of what the stock does going forward).
So, while the pre-market may have been a set up for this stock to move higher, it was the waiting we did for regular trading hours to start that gave us the push to get involved in the name.