Stock Catalysts: How to Identify Them, Key Patterns, and Examples

What has the power to move stock prices seemingly faster than a speeding bullet? Stock catalysts!

A stock catalyst is anything that can move a stock’s price. It can pertain directly to the stock, the company, the industry, or even the world at large.

Wait … there are tons of developments or bits of news that can potentially act as stock catalysts. So how can you tell which ones might actually have the power to move a stock?

I’ll help you answer that exact question. In this post, you’ll get an introduction to stock catalysts, including specific examples. I’ll also give you tips on how to identify a strong catalyst and patterns to watch for. Let’s go!

What Are Stock Catalysts?

A stock catalyst (also called a news catalyst or just a catalyst) is a development that has the potential to move the price of a stock. That’s broad, right? Let’s get specific.

Often, it’s news related to a company or an industry. However, sometimes catalysts can be less direct, like government regulations that can affect an entire industry or sector.

This isn’t something you can brush off as a trader. So pay attention — it’s important. A catalyst can help you find the sweet spot for entering a trade. That can be before the stock price hits its highs (or lows, if short-selling).

Here are some examples of common stock catalysts:

  • World events: Sometimes, something that’s reported in the news can act as a catalyst to move stock prices, up or down.Think back to last year when Canada officially legalized marijuana. That was a huge catalyst that rocked the entire sector of marijuana-related stocks. Select traders made fortunes in record time by trading in this sector, thanks to the heightened interest and speculation around weed stocks.* Yeah, it was it big news, but traders also saw it as a sign of changing times. Suddenly, everyone wanted to get in on the ground floor with pot stocks. As a result, the prices soared through the roof. That’s a good example of a catalyst that made stock prices explode, but it’s important to note that a catalyst can act in the reverse way, too. Bad news that’s connected to a sector or stock can have a negative effect on stock prices.
  • Company news: Sometimes, the news that rocks a stock price is specific to one company rather than the entire sector. A good example here is a tech company like Apple. In this case, you’re looking for anything that may be significant, maybe a major product launch or an announcement of an updated iPhone with incredible new features. These things can move stock prices in a big way.
  • Earnings winners and losers: If you want to be a self-sufficient trader, you have to do research on every single trade. That means you need to review earnings reports for any stock you’re watching.  Public companies are obligated to release their earnings on a quarterly basis, usually not long after each quarter ends. There are certain expectations or projections for a company’s earnings each quarter. If a company misses or beats those expectations, guess what? That can propel the stock price into motion. A company’s performance report can kick off a stock’s uptrend or downtrend. If the company meets or exceeds expectations, that can generate optimism and excitement in traders, and that can boost the stock price. Buyers catch wind of the positive earnings news and rush to jump on the action. Breakouts abound! However, if a stock underperforms and the company can’t specifically account for its lackluster performance, the stock price can decline. Earnings reports can be fairly reliable catalysts. Don’t overlook them.
  • New deals: Did a company sign a big new contract or forge a partnership with an industry leader? New business connections can generate trends in stock prices. For example, when music-streaming service Pandora announced partnerships with AT&T and Snapchat, it contributed to an increase in stock price, raising it almost 20%. Make this part of your research routine. Scan regularly for updates on new partnerships, deals, and contracts — they can all influence stock prices. And the sooner you see the news, the sooner you can act.
  • Hires and fires: Is a company experiencing changes in management? Time and time again, shifts in personnel and management prove to be catalysts for stock-price changes. Just Google “CEO steps down, stock plummets” and you’ll see countless results where the stock price plummeted after a CEO resigned — especially under unfavorable circumstances.  Here’s just one example: The CEO of the tech company Micro Focus left after just six months on the job, and dragged stock prices down a staggering 40%. Now that’s a whopper. Note that depending on the circumstances, the price shift can be more or less. Of course, it’s possible for this phenomenon to work in the opposite direction, too. Maybe a company hires a high-profile visionary employee. If they make revolutionary strides and catch the attention of the press, it can create optimism that raises the stock price.

Check out this video I made about what kind of news moves stocks …

Benefits of Stock Catalysts

Why look to stock catalysts to when trading? Here are some of the reasons:

  • Spot trends early. One of the biggest benefits of stock catalysts is that if you catch them early, they can help you spot market trends before they happen. This isn’t a no-brainer. You have to think critically to figure out which stocks might be affected.
  • Predictable patterns. Once certain stock catalysts occur, patterns often follow.A CEO stepping down can frequently yank the stock price down. A positive earnings report can often drive the stock price up. Nothing in the market is ever 100% guaranteed. But events like these occur enough to where they can be considered reliable patterns.
  • Support your technical research. As the students in my Trading Challenge know very well, I rely most heavily on charts and technical analysis when choosing my trades. However, looking at stock catalysts can help me determine the timing and decide when to make a move. I think they’re extremely important …That said, you should never make a decision to trade solely based on a stock catalyst. You should always conduct technical research on every stock. But a catalyst can help you build a case to trade a stock, pushing you into buy or sell territory. Technical research and stock catalysts work hand in hand when making trading decisions.
  • Identify anomalies. Stock catalysts can help you figure out if there’s an anomaly that’s altered the stock price in a way that breaks a pattern. For example, if you look at a stock’s chart and see that three months ago it jumped up in price, that’s a cue to dig deeper. So maybe you look back and find that’s when they signed a new contract. You can probably assume that’s what moved the stock price. That type of spike is an anomaly, so you can dismiss it when trying to identify a pattern because it’s unlikely to occur again.

Examples of Historic Stock Catalysts

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To help you better understand the concepts detailed in this post, here are some past stock catalysts and how they moved stock prices:

#1 Marijuana Legalization in Canada

When Canada legalized pot, it put many a stock’s price one toke over the line.

Characteristics of This Stock Catalyst

In 2018, Canada legalized marijuana, and this nationwide legalization was a defining and game-changing moment for the marijuana industry.

Companies dealing with the growing, distribution, and sale of marijuana were no longer in a legal grey area or only able to cater to individuals with medical cards. They instantly gained a much larger audience for their products.

But that’s not all. Finances were tricky before the legalization — now these companies could take out bank loans, allowing them to rev up production for a growing consumer base.

What was a niche industry was poised to boom into a multi-billion dollar industry.

Stocks began to shift even before the legalization was made official. The mere potential of legalization motivated savvy traders who saw the budding opportunities, including partnerships with alcohol companies and more.

Following the legalization, many stocks experienced insane growth. For example, Aurora Cannabis was trading at around $5 per share in August, then quickly rose to over $10 per share in anticipation of and directly following the official announcement of legalization.

#2 Starbucks CEO Steps Down

When Howard Schultz left Starbucks, the stock price went down faster than you can say “Frappuccino.”

Characteristics of This Stock Catalyst

Starbucks offers a fascinating example of how a CEO’s departure can affect a stock’s price.

In 2018, CEO Howard Schultz stepped down from his position at Starbucks. Shares fell drastically following the news.

Yep, this is a standard example of a common phenomenon: personnel changes can drive stock-price changes. What makes this particularly interesting, though, is that it was a common occurrence.

You see, Howard Schultz actually had two separate stints as CEO. According to MarketWatch, after his first resignation in 2000, shares fell as much as 28% in the seven weeks following the news.

The second time, it played out a little bit differently — but added up to a similar decline.

When Schultz bowed out in 2017, the decline in stock price was more incremental. First, he resigned as CEO and took the position of Chairman. A veteran of Microsoft and IBM took his place. This affected the stock price, but not massively.

When he stepped away from the company entirely, the news had its biggest impact, with shares declining sharply. The stock eventually rebounded, but it’s a great example of how a notable C-suite departure can often move prices in the short term.

#3 Tesla CEO Smokes Pot

Puff, puff … pass? Elon Musk’s on-camera blaze scorched the company’s share price.

Characteristics of This Stock Catalyst

He smoked, and he appeared to inhale. After Tesla CEO Musk was captured on camera smoking weed during a Joe Rogan interview, the stock plummeted.

Of course, there’s more to the story. This was just the straw that broke the camel’s back after a series of missteps on Musk’s part. That includes an unfortunate tweet about taking the company private, as well as a wave of resignations among company leaders.

Amid gossip about Musk’s potential drug problems and general pessimism about the company’s future, shares tanked. In record time, the stock that had traded for $370 or higher was now in the $250 range.

It was an alarmingly quick descent, and it took time for the stock price to rebound.

#4 Passage of the Farm Bill

Many traders saw the recent Farm Bill’s passage as the start of a CBD stock frenzy.

Characteristics of This Stock Catalyst

You could consider CBD the second wave of the pot-stock fever that hit in 2018 after Canada’s legalization.

In late 2018, a news event rocked the world of weed stocks: The U.S. passed the Farm Bill, legalizing industrial hemp, a common source for CBD.

CB-what? CBD, or cannabidiol, is derived from the marijuana plant. But unlike THC (tetrahydrocannabinol — the psychoactive, get-high compound), CBD is non-psychoactive. It’s touted as a wonder cure, but because of its connection to marijuana, it’s mostly resided in a legal grey zone with a limited audience.

Once the bill passed, all eyes were on the CBD sector. In particular, traders were looking at existing operations, as they had an infrastructure in place and were primed for a huge surge in business.

With the potential of high-profile partnerships and much larger distribution channels, optimism was at an all-time high, and many CBD-related stocks saw big swells following the Farm Bill’s passing.

#5 MagneGas Reverse Stock Split

No splitting hairs about it: A reverse split tends to inspire pessimism and bring a stock’s price down.

Characteristics of This Stock Catalyst

If you’re not familiar, a company will implement a reverse stock split when its share price is very low. They reduce the number of shares available but raise the price per share. It doesn’t change the value, but it’s generally seen as a bad sign for the stock.

Why? Because companies with poor performance are usually using reverse splits to minimize the risk of being delisted from an exchange due to the low price per share.

This isn’t always the case … Sometimes they do it to gain more respect in the market by increasing the share price. But the perception is generally negative, so reverse splits tend to drive stock prices down.

Here’s a recent example: MagneGas Applied Technology Solutions, Inc. performed a 1-20 reverse split of its stock. Suddenly, shares trading for less than 25 cents were consolidated into shares of about $4.15.

By the end of the next trading day, shares were trading below $3, which just goes to show traders’ distrust in reverse splits.

Key Tips While Dealing With Stock Catalysts

Want to make the most of stock catalysts? Follow these tips.

You Must Use a Stock Screener

It used to be that traders had to rely on multiple sources to research stocks. They probably used a trading platform for technical research, then subscribed to various news sites to watch for potential news catalysts.

That’s no longer necessary. Now traders can use a stock screener that combines all of these elements on one easy-to-use program.

That means you can use a stock screener to run charts and review price action, and you can execute trades from it. Even better, you can also keep track of the news and potential catalysts.

StocksToTrade is my favorite stock screener and trading platform. It’s super easy to search for stocks by percentage gainers, daily highs, and more. These indicators can alert you to potential breakouts. This video explains StocksToTrade in 90 seconds:

However, a catalyst can mean the difference between a breakout and a stock that stays stagnant. This can be especially true with low-priced stocks since they tend to move more based on news.

STT includes a news streamer to help you find news that’s relevant to your watchlist stocks. You’ll get instant updates on anything that might affect your stock. You can also scan for specific keywords — if you’re looking for a particular catalyst like earnings winners, STT can help you filter and find potential stocks.

Trade Only High-Volume Stocks

Let’s say that you hypothetically just found an amazing catalyst (or series of catalysts): A company in a trending sector hires a hot new CEO — and they announced the cure for the common cold. This stock has nowhere to go but up, so you should jump on the trade, right?

Not so fast. I want you to be ahead of the trend, but I also want you to know that there’s never a sure thing in the stock market. You still have to do research and consider the stock from multiple angles.

One important consideration is volume. No matter how amazing the catalyst might be, if there isn’t sufficient volume, stay away!

Volume refers to the number of shares being traded each day. If the volume is very low, this means that the stock has low liquidity. This means that not a lot of shares are moving. And that ultimately means that it can be tricky to enter or exit a position.

Now, if we’re talking about volume, we have to also talk about volatility. Volatility is a measure of how quickly a stock’s price moves up or down. The faster it moves, the higher the volatility.

With the low-priced stocks I trade, the volatility tends to be higher than higher-priced stocks. That’s because these are up-and-coming or smaller companies, or they might be in still-emerging fields. Simply put: They don’t have the data and stability of large-cap companies.

The volatility can be a necessary evil. Yeah, it can be scary! But it can also help you — if you know what you’re doing.

A news catalyst can increase volatility further. So you need to make sure that there’s enough volume so that if you decide you want to make the trade, you can get in and out according to your trading plan.

Here’s what could happen without sufficient volume. Let’s say you enter a position and it leads to insane profits. But you hit a big snag: There’s not enough volume. You can’t exit your position before the trend reverses because there aren’t enough buyers. You’re stuck. Goodbye profits!

Nobody likes being stuck in a position longer than they need to be. So make sure there’s sufficient volume. I like to see at least a few million shares in play.

Always Seek More Knowledge

If you want to be smarter about stock catalysts, then you need to take an intelligent approach to trading in general.

I established my Trading Challenge as a specific and targeted way for traders to get an education in the market that just wasn’t available when I was started trading.

I didn’t have a mentor, so I had to learn things the hard way. I was disappointed that there weren’t better resources out there for traders, so my Challenge strives to be that resource for others.

My curriculum isn’t your typical school experience. Yes, you can learn about the basics of trading. But my real goal is to teach you how to be a self-sufficient trader.

That’s why I tailor my teaching to the market as it is right now, not how it is in general.

In the Trading Challenge, you’ll gain access to a massive DVD library, live trading sessions every Wednesday morning, live lessons every Wednesday night, as well as live trading and webinars with some of my top students.

Speed up your learning curve. This is an opportunity to join a great community that can help support and inspire you on your trading journey.

The Bottom Line

Stock catalysts can have a powerful and rapid effect on stocks. They can make stock prices surge or plummet in extremely short periods of time.

By educating yourself on common catalysts and their effects, you can better be poised to face them in the future. They can also help support your case for a trade or signal you to walk away.

Of course, stock catalysts shouldn’t be the only deciding factor when choosing stocks to trade. They’re just part of the picture. Be sure to include them in your daily research and pair them with thorough technical and fundamental research.

What’s your experience in trading stock catalysts? Leave a comment and share your successes, your failures — I want to hear all of it!