Cognizant is an interesting case to study. I lost money on it by following the large volumes. You can see from Figure 16 that large players had been selling until May 2, 2006, while the price during the last trading day seemed to hold fast. At that time, I was looking for a short play, and thought I had found one. I placed my short order on May 2, just before the market closed. I have rarely lost money so quickly by not doing my homework. (See Figure 17.)

The reason for the misinterpretation is that we were very close to the day earnings were announced. At such a time, some fund, like some private investors, would prefer to be out of the stock instead of taking a possible "hit" because of a bad earnings report. However, very few large funds would increase their risk just one day before earnings are announced. In such a case, the decrease of Large Effective Volume just prior to earnings release had "risk reduction" as its objective, and could not be interpreted as taking a position due to "superior information".

Had we seen large players increasing their position just before earnings, it would have been a positive sign for the stock. Why? Because funds do not increase risk without reason (just before a major earning release); therefore we could have concluded that the fund had superior information indicating positive earnings.


Fig 16

Fig 17