There are many subtle and not-so-subtle tell-tale signs which will give you an indication of a company's future prospects. In isolation, the impact can vary enormously, but the cumulative effect of several tell-tale signs coming together can be significant. So, what are the main tell-tale signs of acompany’s future prospects?
Director share dealings
Many execution only traders look very closely at directors' share dealings as, in effect, they are "legal insiders". As a result, they are often restricted on the times they can deal in their company shares, although there are some exceptions to the rule. As a short term execution only trader, it is also important to note the number of directors who have traded and the size of the transactions compared to their existing holdings. Context is everything!
Trading ahead of expectations
It is crucial to note that company announcements to the stock exchange are strictly regulated and monitored. Therefore, if a company announces they are trading ahead of market expectations, it must be 100% certain this is the case. As a result, trade execution can be challenging if a company makes such a statement, with often volatile share price movements either way. As an execution only trader, this can often lead to overbought and oversold positions, perfect for day traders and swing traders.
Sector prospects
While execution only traders tend to focus on company-specific announcements, it is also essential to look at the performance of individual sectors. This can often indicate the general trading of leading companies in the industry. You will often see shares rerated if their leading competitors announce good news or sell-offs if the news is not so positive. If a sector performs exceptionally well, it is not uncommon to see mergers and acquisitions, leading to huge share price swings.
Management changes
Typically, listed companies prefer to warn the market of future management changes well in advance. For example, it may be that a founder is handing over the baton of the company, which is moving in a new direction which requires a different management skill set. Unexpected management changes, positive and negative, can often lead to significant share price swings and a challenging trade execution environment. However, many short-term traders will look to take advantage of this uncertainty on the upside and downside.
Fund raisings
As an execution only trader, looking very closely at individual share price movements, you can often get an idea of what may be happening behind the scenes. For example, if a company's prospects appear relatively positive, but the share price is not responding, it may show weakness; this could indicate a fundraising is on the way. Typically, although not always, fundraisings are carried out at a discount to the prevailing market price to attract institutional and private investors. Once the news is out, you will often see a relief rally in the share price, a perfect opportunity for execution only short-term traders.
Chart signals
Even though many day traders will look to take advantage of short-term price fluctuations, they tend to monitor markets, sectors and particular shares on an ongoing basis. The share price chart can be handy for those with neither the time nor the inclination to watch for the tell-tale signs of a company's prospects. Trade execution based purely on chart signals may appear risky to some people, but ultimately the share price should reflect all known and potentially unknown information.
Summary
Shorter-term execution only traders tend to focus on overbought and oversold positions. While the change in the share price will reflect both the public and often non-public information, in the short-term, the price can be overstretched on the upside and downside. This is akin to an elastic band which eventually springs back to its “natural position”.
In this scenario, trade execution comes down to timing and understanding the markets. Unfortunately, human nature means we are often over-exuberant on the new upside and overly pessimistic on the downside, a perfect scenario for short-term execution only traders.