One stock I'm taking not of here in the red today is shares of Microsoft (NASDAQ:MSFT). The reason I want to point this out now is that it could put a bullish trader at risk that traded shares of PeopleSoft (NASDAQ:PSFT) long at the open who now has a nice gain at risk.
I write a lot about how important it is for traders/investors to be monitoring "like stocks" and BIG stocks in the sector that you may be trading. Here's some observations I think we can use to perhaps get inside the head of the market as it relates to this morning's action in PSFT and now MSFT.
Microsoft Chart - $1 box
Sometimes it helps to think like a hedge fund manager. Notice how similar (yet different) the MSFT chart is compared to this morning's 09:00 EST Update and chart of PeopleSoft (NASDAQ:PSFT). There was a similar little handle, but the chart of MSFT shows a sell signal and bearish price objective associated with the stock. A hedge fund manager may be shorting shares of MSFT here with a stop just above $59. At the same time, they could have been going long shares of PSFT as outlined this morning.
The negative action we're currently seeing in MSFT may weigh on the sector near-term and this could affect a bullish trade in shares of PeopleSoft (PSFT). At the time of this writing, shares of PSFT are up 11% at $28.51 and came very close to this morning's near-term bullish target of $30-$30.37 when the stock traded $29.54.
Try making some of the same type of analogies in your trading. If your in a stock that isn't moving or you're in a stock that is outperforming the group, try and come up with a scenario and then follow and test that scenario. I think a hedge fund manager would have been relatively wise to short $1 million worth of MSFT at the open this morning and offsetting that short with a $1 million buy in PSFT. Short the weak and buy the strong. This would be considered a "synthetic" hedge in the software sector. The belief being the strong (PSFT) will outperform any upward move and the weaker (MSFT) outperform on a downward move.