Volatility not a game

Big moves tend to attract traders like moths to a flame, and in many cases give them an itch to do something before what could be fleeting “opportunity” disappears.

For long-term investors, that could mean taking profits on a stock that makes an unexpected surge, or exiting because of a sharp sell-off to prevent additional losses. For shorter-term traders, especially those with a contrarian bent, it can be tempting to consider large moves—especially those driven by unscheduled “surprises”—as potential overreactions that offer the opportunity to trade the counterreaction.

Possibly, but FOMO doesn’t constitute sound investing or trading practice, and markets are apt to punish those who enter positions with little or no specific information. A move from Tuesday helps illustrate one reason why. Gaming stock Light & Wonder (LNW) fell nearly 20% intraday:

That also left the stock down almost the same amount from last week’s close. The move followed reports that a Nevada court had issued an injunction on one of LNW’s games, which a competitor claimed infringed on its intellectual property. For its part, the company announced it would promptly file an appeal, and continue to “vigorously defend” against the claims.¹

In addition to landing on the LiveAction scan for biggest one-week implied volatility increases, LNW also  appeared near the top of yesterday’s scan for largest percentage losers:

While it’s impossible to draw conclusions about any legal action, especially one at such an early stage, LNW’s price history suggests traders eager to cast a verdict on the stock’s sell-off may have wanted to exercise caution.

The stock has fallen at least 15% intraweek nearly 160 times since it began trading in 1984, but many of those moves were part of larger, multi-week sell-offs—not pullbacks from significant highs, as this one was. Last week LNW hit all-time intraday and closing highs. Not only has the stock never fallen as much as it has this week after hitting an all-time high the previous week, it’s fallen 15% or more intraweek after hitting a four-week high only 38 other times. It closed lower the following week in 25 of those instances, with a median decline of 1.9%.

One thing traders may be watching: where the stock closes in its weekly range. There was an interesting split in the performance depending on whether LNW ended the sell-off week in the upper or lower half of the range. When it closed in the lower half (31 times), its median return the following week was -1.9%. But when it closed in the upper half (seven times), its median return the next week was -2.9%, which suggests a quick rebound wasn’t necessarily the best medicine for a stock attempting to stabilize after a surprising news event.

Market Mover Update: Morgan Stanley & Co. economists think the Fed is most likely to follow up last week’s “jumbo” rate cut with smaller (0.25%) reductions the remainder of the year (see “As the Fed Recalibrates, What’s Ahead for Central Banks?”).

High-profile commodities remain on the move. On Tuesday, November WTI crude oil (CLX4) topped $72 for the first time in three weeks, then retreated to close below that threshold—but still up more than 1.5% for the day. December gold (GCZ4) rallied more than 1% intraday to hit yet another record high.

Today’s numbers include: Cintas (CTAS), Micron (MU).

Today’s earnings include: New Home Sales (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.

¹ Financial Review. Aristocrat wins dragon game injunction against Caledonia-backed rival. 9/24/2024.
² All figures reflect Light & Wonder (LNW) weekly prices, 1984-2024. Supporting document available upon request.