Reason to Respect the Tape

 As I saw the tape drenched in red today, with seemingly everything trading underwater, one stock in particular stood out -- Broadcom (BRCM). I had traded the stock a few weeks back, entering on a break of 36.50. That level had served as resistance not only since May, but actually back from the highs in 2002 and again in 2006 and 2007. The break on 7/12 looked clean -- although noticeably lacking in volume -- and I entered the trade. To say the least, the trade got bumpy at times, as BRCM traded in the turbulent fashion that is familiar to high beta stocks. On Tuesday, 7/12, BRCM reported its Q2 financial results, with a beat on the top and bottom line, and management guided higher going into Q3. Yet the stock traded oddly that day -- initial strength in the morning was met with extreme selling pressure, as the stock got rejected at the 38.40 level, the high of the previous day. I took note of the strange action, especially since the stock should have traded better after delivering a quarter that was clean from all standpoints. I exited the trade at 36, which qualified as a break below the breakout level, and proceeded to watch the stock stall out below the 20-day moving average. Down days were accompanied by high volume; up days only retraced some of the damage and came on significantly lower volume.

Today, as the stock fell more than 6% on analysts' concerns surrounding slowing orders for their chips, I was reminded of a quote from the story of Jesse Livermore, chronicled in Edwin Lefevre's "Reminiscences of a Stock Operator." In it, he tells the reader that:

"the tape does not concern itself with the why and wherefore. It does not go into explanations....The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. The reason can wait. But you must act instantly or be left."

In the context of this quote, it appears that a plausible explanation for BRCM's sloppy trading after it turned in a solid quarter could be that analysts were beginning to fear an inventory glut and the slowdown in demand for the company's chips. The moral of the story is to not say, "that was a terrific quarter; the stock shouldn't be down. The company is firing on all cylinders; I think I'll buy more." ALWAYS listed to what the tape is telling you. The market looks forward, and BRCM's quarter was in the past. Listen to the tape, don't make excuses, and don't be afraid to sell when a stock's action turns against you.