Mad Money Machine

Jim Cautioned Against After-Hours Trading

On last Thursday’s Mad Money, Jim Cramer warned investors not to do after-hours trading. Wow, that show really was fantastic. But in a way, it was weird. He talked about after-hours trading in the context of Bristol-Myers (BMY). When it announced it had settled its Plavix litigation the stock traded up immediately in after-hours trading. Jim gave a second-by-second recap of the trades and the pricing. Jim cautioned against after-hours trading because the professionals are faster than us.

Weird Thing #1: While Jim said that people who bought after-hours lose money, the actual fact here was that anyone that bought BMY up until 7:00PM that day MADE MONEY at any time the rest of the week. Yes, it turns out that even the highest price paid that evening of $25.04 was lower than the lowest price all the rest of the week!

Weird Thing #2: Here’s what was really curious about the segment: He warned against doing after-hours trading in the context of a company news announcement. He DID NOT and NEVER DID talk about it in the context of HIM mentioning a stock on his show! Very subtle, perhaps humble. Perhaps legalistic? The closest he came to saying, “Don’t buy after-hours the stocks I am recommending” was, “If you want to buy anything that is up on good after-hours news, you be patient! Hey, maybe even wait a week or two for some weakness and then buy. Otherwise the professionals will eat you alive.” [Referring perhaps to that paper by the NorthWestern students who said to wait 12 days.] But look, we all know some people need to be hit over the head with commands not subtleties.

Weird Thing #3: Jim said, “Very very few people have what it takes to buy stock after-hours and make money. They are professionals. Please, please, please do not try to beat them!” The problem is that Jim is confusing people by saying that it is the “fastest guys beating you to the punch” or that the “professionals will eat you alive.” I think the simple fact is that there are no sellers of the stock at the closing price at 4:30 or 6:30 or whenever. So when speculators buy in after-hours, the not-so-sharp ones put in market orders that are filled at previously-high set sell prices. It doesn’t really have anything to do with being fast or slow. Just ask vs. bid price. I don’t believe it is professionals buying the stock. I believe it is amateurs doing market orders. Or heck, they could be doing limit orders but only the highest limits are going to get filled.

Compare BMY with an otherwise non-news stock like PFE. In after-hours trading of PFE on that same day, the volume of trading was light and there was no imbalance of buyers over sellers. And an occasional seller would show up and want to get rid of their PFE at near the closing price. PFE stock traded in after-hours near its closing price.

In fact, the same exact opposite thing to BMY happened to MSFT that same day: On the announcement of the Vista delay, the after-hours price fell sharply because there weren’t any buyers lined up to accomodate all the head-for-the-exits sellers.

Just simple market dynamics. Isn’t there some rule about when there are too many buyers and not enough sellers, the prices tend to go up? Instead of confusing things by talking about fast, professional traders, Jim should describe the fundamental truth about what is really going on: It is a stock market. More buyers than sellers equals higher prices.

On my show “MMM-007: The Free Lunch” from January 27th and in this posting, I went through almost exactly the same second-by-second analysis of the after-hours trading in a stock Jim pumped heavily: Rediff.com (REDF).

On every show just before he features a stock, Jim should reiterate this quote: “Be fearful when others are greedy, and greedy when others are fearful.” Don’t buy when everyone else wants to buy. Don’t sell when everyone else wants to sell.

Happy investing,
Paul