Magical Run or a Bunch of Hype?

By Larry Putnam, Contributing Writer

Business Week is a respected bastion of the financial media. Like much of the mainstream media, the magazine has a penchant for publicizing trading successes. In its July 24th issue, BW printed a 4-page analysis of "Inside Wall Street" columnist Gene Marcial's stock picks for 1999. The article concluded that columnist Marcial had a "very good '99" and called his stock-picking results "impressive" and "sensational" for last year.

The article presented several pages of numbers supposedly showing Marcial's weekly 1999 stock tips "trouncing" several indexes - the Dow Jones Industrial Average (DJIA), Standard and Poors 500 Index (S&P 500) - and slightly trailing the Nasdaq Composite Index (Nasdaq). Business Week measured the price performance of each stock recommended in Marcial's column during 1999 and compared price performance against the S&P 500, DJIA, Russell 2000 and Nasdaq benchmarks. Price performance was measured against these indexes one day after the column was printed as well as 1 month, 3 months and 6 months after publication of the stock tips.

Business Week eagerly reported that Marcial's picks were up an average 8.8% the day after they appeared in print in 1999. This compared to an average daily increase of only .5% in the S&P 500 index in 1999. Of course Marcial's picks jumped the day after publication! Day traders hoping to make a quick buck bought his popular picks and gave his recommendations a quick boost the day after they were released to the public. Whenever a brokerage firm releases a buy recommendation on a stock or Joe Kernan broadcasts positive comments about a stock on CNBC, hype-reactions happen. The short-term momentum traders react and "pump" the recommended stock's price higher. Later (a few minutes, a few hours, a few days), the day-traders "dump" the stock and long-term investors or inexperienced day-traders who get sucked into this game lose money - sometimes lots of money.
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