[[Start here]] → [[expose to return drivers|drivers]] → [[strong stocks beat weak stocks|strong beats weak]] → short term reversals --- Psychologically, people often have a strong reaction against the very new. When markets overreact, prices often snap back. Whether this reaction is driven by preservation or conservatism is hard to know but it's statistically a reality. Company share prices often spike up or down sharply on good or bad news but the market, in its conservatism, often acts quickly against the new information leading to temporary reversals. There’s a behavioural reflex. A study by Lehmann (1990) showed that _buying_ the market's biggest 1 week _losers_, and _selling_ the biggest 1 week _winners_ generates a profit 90% of the time. Jegadeesh (1990) also confirmed that recent returns exhibit reversals at timeframes up until 2 months. While these patterns are no longer as predictable due to hedge fund arbitrageurs, the patterns are some of the most reliable in finance. We found that [[profit warnings bounce intraday proportionally to their decline]] - so these effects seem to happen intraday too. ## **Rules of thumb** - If a stock you like has spiked on good news, it can sometimes pay to wait, as the price often cools before the next leg up. - If bad news hits one of your holdings, don’t rush to sell at the trough - short-term reversals often do bring relief rallies. Nonetheless don’t wait too long! ## **Sources** - Lehmann, B.N. (1990). _Fads, Martingales, and Market Efficiency_. _Quarterly Journal of Economics._ - Jegadeesh, N. (1990). _Evidence of Predictable Behavior of Security Returns_. _Journal of Finance._