While over the long term the market is efficient, studies have clearly demonstrated that in the short term it is not. This is due to the market overrreacting to news. With “hot money,” program trading and present positions creating the “cascading effect,” short term the market is very inefficient. And it is in inefficiences where profits can be made by small cap traders.
Newl is the most recent example as it was a top gainer on Wednesday of this week and a top loser yesterday. Studies show that stocks revert to their mean, or standard average, price. Small cap stocks are particularly vulnerable to wide fluctuations as many are thinly traded. Savvy traders can profit from this as stocks such NewLead, Dex One Corporation and NeurogesX were all top gainers and top losers in the same week.   A recent article in www.smallcapnetwork.com details how this transpires.
SeraCare Life Sciences is an excellent example of how to profit from an arbitrage opportunity in a takeover situation. Recently, a buyout was announced at $4.25 for SeraCare. The day of the offer, the stock was a top gainer, soaring to over the buyout price. Now it is trading at about $3.89. Nothing has happened to the buyout offer at $4.25: it will still be consummated. But some have decided to sell rather than wait for the date for the deal to close. Traders can profit through buying SeraCare at about $3.90 and taking the $4.25 buyout offer.
Warren Buffett made over 80% annually from these special situations, as discussed in a previous article on www.smallcapnetwork.com. There is no reason why small cap traders should not do the same.
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